Mastering Change Orders: Profit Boost or Project Killer?

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ℹ ABOUT THIS EPISODE

86% of contractors are seeing more change orders in 2025 - are they boosting your profits or breaking your projects? Wade Carpenter and Stephen Brown reveal how to turn change orders from chaotic disruptions into profitable opportunities. 

Learn essential documentation practices, workforce training strategies, and contract language that protects your bottom line. Discover why better planning beats hoping for luck, and get actionable tools to track and manage change orders like a pro.

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⌚️ Key moments in this episode:

• 00:23 Current Trends in Change Orders
• 01:43 Types and Management of Change Orders
• 02:41 Accounting and Documentation
• 04:12 Challenges and Best Practices
• 07:07 Communication and Pre-Planning
• 13:19 Profitability and Strategic Planning
• 16:45 Conclusion and Resources

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Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com

Transcript

Wade Carpenter: [00:00:00] You can have the best laid plans, the best crew and the clean of schedule and one change order can shake the whole thing like an earthquake. Suddenly the walls don't line up. The budget cracks open and you're scrambling just to keep the project standing. Today we're diving into change orders in 2025.

This is the Contractor Success Forum. I'm Wade Carpenter with Carpenter Company CPAs alongside Stephen Brown with McDaniel Whitley Bonding and Insurance. Stephen, what is going on with change orders in 2025? 

Stephen Brown: Well on a recent AGC poll, 86% of contractors say they're seeing a lot more change orders than they've ever seen before. We can talk about change orders today in a bunch of different ways, but most importantly we're talking about the management of change orders. As a general rule, most contractors say, well, change orders are profitable, because it allows me to dictate my price, and I'm the one that's being inconvenienced and disrupted. So that's the case when you bid a project and you have a change order issue that comes from your plans that you bid from or a [00:01:00] miscommunication with the owner or the owner changing their mind.

Let's just talk a little bit about change orders. What they are, what different type of change orders there are, and how to effectively manage them. Because they can be a huge source of profit for you or a huge headache. 

Wade Carpenter: Absolutely. Probably like you, I've been told by many contractors, I make my margin up in the change orders. But too often people do not have their procedures down. They don't get them signed and sometimes these can be a source of litigation and argument. It's like unmanaged change orders, you gotta leak in the roof and you sort ignore it and before too long you got a big mess. You're fixing that just cascades and wrecks your whole project. So I guess those are some of the things we're kicking around today, but where do you wanna start this off? 

Stephen Brown: Let's just talk about the different type of change orders. There's scope changes in the actual scope of the work that they want you to do. There's material or method substitutions, there's schedule adjustments, price increases, weather delays, there's [00:02:00] timing issues that could affect liquidated damages.

The owner stops the project ' cause of funding issues. There's all sorts of reasons there could be a change order, and how you manage that change order, how you track that change order really depends on you making that gross profit margin.

I remember I had an old photograph on my computer somewhere. I don't know where it is. But it showed a large yacht and it was a photograph and the name of the yacht was Change Order and the dinghy hanging on the back was the contract. That brings a smile to any contractor who will get a $12,000 change order that will cost them $8,000. That's a huge chunk of profit. It seems small, but the profit margins are huge.

Wade, what do you do as an accountant when you advise your customers on these big change orders? How to account for them, how to plan for them?

Wade Carpenter: Well, sometimes you can't plan for them. It depends on who you're dealing with. You got an unsophisticated owner like we don't much get into the residential here, but the custom home builders, [00:03:00] sometimes they're dealing with people that want a specific thing and they'll change their mind halfway through and they don't realize what that's doing to the project and how that can disrupt the entire flow.

But, going back to your question, it is one of those things that when we're looking at a contract schedule or trying to turn in a WIP schedule to you, we see the numbers don't make sense. Maybe the gross profit margin, if the change order is already in there, well it's gonna look like it's huge, but they forgot to change the estimated cost on that.

Again, there's a lot things from my perspective that tend to end up sort of wrecking those job schedules and people not really knowing how they're coming out, and is that change order actually approved or signed? Those kind of things. 

Stephen Brown: That's the number one rule. We should title this podcast, Get It In Writing. 

Wade Carpenter: Yeah. 

Stephen Brown: Everybody knows that. Any attorney will tell you that. Get your change order in writing. And the reason you get your change order in writing is because people have short memories. If you don't get it in writing, if your project [00:04:00] manager does not get it in writing and track it then you may forget to bill for it. And then you've incurred costs that you can't bill for. Maybe the project's closed out and you forgot to bill for certain change orders.

So maybe we could talk a little bit about why change orders are happening so much more frequently right now, and then maybe we could talk a little bit about how to track those, how to manage them, how we're gonna maximize the profit that you make on them. 

Wade Carpenter: Yeah, I think you probably can go into this a little more than I can, but labor shortages, supply chain issues, some of these pricing issues. You wanna talk through some of those kind of things? What's driving this in 2025? 

Stephen Brown: Well, a lot of it has to do with design build construction projects. I think the federal government's going a lot more toward design build contracts. So that's coming up and right now we're seeing an increase of those. And interestingly enough, the government is just passing a law that on change orders that were properly executed, the government has to go ahead and pay you 50% of [00:05:00] that instead of dragging it out for months and years.

It's a way to protect the contractor because in federal government contracting, there's probably more change orders than most other contracts because you're working on military bases. You're having design changes, you're having a scope change in the middle of a project. So we see a lot of that.

 But also we're talking about labor shortages. Managing your labor, going into a project before it starts is one thing, but then having a scope that could drastically change the amount of labor you need. You might can only guesstimate of what those costs are gonna be and you can estimate them on the high side. But what you don't want is you don't want your change orders to bleed Profit like any other project that you bid.

You do not want that change order to bleed Profit. And then you've got supply chain issues. Since we're doing business on a worldwide basis, a lot of people are ordering materials and supplies all over the world. So tariffs affect that and availability affect that. So that's another issue. Then the prices, [00:06:00] we talked about the tariffs raising prices, but then we talk a little bit about one of the methodologies of controlling change orders, what you put in your contract about price escalation. Force maje ure language that in your contract can help protect you from these fluctuations. We talk about that. But I guess mainly I wanted to talk about best practices of what we can do to manage change orders more effectively. 

Wade Carpenter: Yeah. I know part of the thought here is it can even though you may make some extra margin on it, it can actually wreck your job. And say okay, well we're gonna extend this concrete pad out or whatever, and you got the staff for something, but now the job has doubled. Well, maybe you don't have the people for that or you got a crew and you don't have the labor to actually finish out the job like a concrete pour or something like that. So there's a lot of things that go into it.

If you're ordering from these different countries and you can't get because of say Ukraine or whatever with some war issues or whatever. We've seen some of that in some of our clients.

So [00:07:00] anyway, let's talk about the best practices. What can we do to mitigate some of the madness that goes into dealing with change orders? 

Stephen Brown: A lot of it, I believe has to do with communication. We've talked before about the communication process of getting something built. An owner expresses what his or her needs are for a construction project, and they discuss that with an architect. You ask a lot of questions to try to get that building to function exactly the way that owner needs it to function.

What are the priorities of this building? What is the owner like aesthetically? How much leniency does the architect have in the design phase? Then you've got the architect that's gotta go before they put the plans together to get the engineers to do everything from engineering the soil to all the engineering phases of approval of the project design.

Then you've got to take that to the owner, make any changes, and more importantly you've got to freeze the process somewhere. Where you say, no more design changes before procurement goes into [00:08:00] place. And a lot of times that just doesn't happen. It sounds like it would, doesn't? It sounds reasonable, but before you put it out to bid that you've got your specs done.

But I see more and more job bids delayed because one of the contractors that wants to bid on the job has an incredibly important question that'll affect the whole scope of the project, and it hasn't been addressed in the plans or in the specs . 

Wade Carpenter: Yeah, I've seen that with one of my clients was telling me some stories untrained project manager for the general Contractor side and they didn't have things done right to where they could come in and do their work. It's caused all kind of havoc with this particular job that they can't get it done. People started pointing fingers and all this stuff and it all boiled down to a project manager really dropping the ball and they actually ended up getting a change order because they could prove it was their fault.

But again, when we get into change orders, documenting these things I think is part of the best practices. What else do you see? 

Stephen Brown: Well, the [00:09:00] first one is like I said, better planning. You plan better ahead of time. You invest in BIM and constructability reviews. You have pre-construction walkthroughs, and then you put that design freeze in place before procurement. That's the first thing. And then you could get into what about developing your workforce to deal with these change orders? What would that look like?

Wade Carpenter: Well, to me I would think you would train your project managers, whether you're a general contractor or a sub or whoever, if somebody's coming in and telling you to do something, or even training your crew, number one, you need to document it before you just go do it on the job and then worry about it later. You need to have some procedures in place, and don't have your crew just do it because the foreman said to do it from a different trade or something that doesn't know necessarily what your scope's supposed to be. 

Stephen Brown: Yeah, you're exactly right. And hiring more experienced project managers helps too. But constant training about dealing with change orders. Because here's the thing, you wanna make [00:10:00] your customer happy, but you don't wanna do something for free. I've always seen people that get a good relationship with an owner and do repeat work for them.

It's not the cost, it's how fast and perfectly they do the project. That's it. With this minimum amount of headaches involved. And so that's a huge part of your relationship. You don't wanna burn bridges if you don't have to, but you also want to be real clear about the change orders when they happen so you can price them and get that added profit in it. 

Wade Carpenter: Absolutely. It also sort goes back to the documentation I was talking about before too. I guess the old saying, if it's not documented, it didn't happen. And if you're trying to win a dispute without a signed change order, if you don't have it documented sometime... I actually had one in Texas in the last year or so that was fighting, but they had text messages and they had actually voicemails. They have retained some of this stuff. And it's not the ideal type of documentation, but at least they had some kind of documentation. But they also sort of got in trouble because they did not follow the [00:11:00] rules. The guy said, well, we're gonna figure all this out at the end, but they ended up on the losing end of that one, and ended up in a lawsuit and only recaptured, like just small portion of what all they had put into this particular build. So again I say the documentation is one of the key things. 

Stephen Brown: Yeah you might say, my attorney tells me I've got enough documentation that I have a case. But that's the first thing the attorney's gonna ask for when you wanna sue someone over a change order not being paid is what documentation do you have in place?

And again, Wade, you don't wanna have to sue anybody. You do not wanna go to court. You wanna have the ammo in place that they have to say yes. They don't have to, you still might have to sue them. You might have a litigious owner, but hopefully you'd know a little bit about that before you did work for that particular owner.

We talked about putting contract language that allows you to manage the change orders better. Escalation clauses. We've done podcasts on escalation clauses, force majeure language in your contract. It's the most [00:12:00] simple defense for you as a contractor to protect yourself from price escalations. Again like we'll always say, the construction business is the one type of business where there's no limit on how much money you can lose on a project, but there is a limit on how much profit you can make.

The change orders feel like, well, this makes the stress of contracting a little more palatable. I got a good chunk of change finally, someone's paying me. But we talked about if you don't document it and you don't keep a log or track it somehow, it's gonna sink your ship.

One thing that we can provide our listeners is a Excel spreadsheet we've developed, an instruction sheet on tracking those change orders and there's dropdown boxes. The instructions are pretty clear, but that's a start. You have a change order sheet on each job, and you can add to that spreadsheet at each project on there, so you can literally pull up and see where your change orders are across all your projects. 

Wade Carpenter: Yeah and I appreciate you putting that together. How can we [00:13:00] get that to our listeners? Can they email you or?

Stephen Brown: We can have it available link, to our website or they can email me at Stephen S-T-E-P-H-E-N @mcwins.com and I'll be happy to email ' them a copy of it. 

Wade Carpenter: Okay, well maybe we can come back to that in just a minute, remind our listeners about that. But let's just talk about for a minute. How can these change orders be profitable and not end up wrecking it? I think about change orders like you had a big meal at a nice restaurant and then they bring a dessert. These add-ons, that's where the restaurant makes really good profit. And so how are our contractors supposed to find that dessert offer, that really high priced dessert? 

Stephen Brown: Well, a lot of times what I see is there's certain infrastructure type work that municipalities need, and they're using grants and government funding to get the amount of money they need for that infrastructure project. By the time it gets to bid, it may be half again or twice as much as they applied for in the grant.

So the contractor's gotta be willing [00:14:00] to go in there and downsize the scope pre-bid to be in the range that they have the money to spend, and then be prepared for them to reapply to get additional funding for what they need. So a contractor's ability to help an architect or engineer scale down a project to get it in line with the owner's pricing is huge right now.

Another thing, there's just certain type of projects that have more change orders than other projects. And if you wanna particularly look for those type of projects, I don't think that's the way to go. I think everybody knows in their trade where change orders can be had and how to account for them.

But a lot of times, a project will be out of the money and they'll go through a particular bidder that they know and they'll say let's re-engineer this after your low bidder, let's re-engineer before we issue the contract. 

Wade Carpenter: Those are great thoughts there. Sometimes you want to strike a balance between gouging your owner and you don't wanna burn some bridges there. But I think this is one area that a lot of [00:15:00] contractors miss.

One of the things I think they miss is that, okay, well yeah, we can just add this on and it just costs this much more with materials, but it's also going to take six weeks to get that part in, or whatever it is. And so it ends up dragging the job out. So you end up having things like equipment on the job that you rented that's costing more money. It's also, maybe you're having to send the crew out there more times. And so a lot of times people don't understand how these costs can escalate from these change orders. So anyway, that's my thoughts on it. 

Stephen Brown: Yeah. No, you're exactly right. As a contractor, your job is to help educate the owner and the architect about change orders in the pre-construction phase. You tell them what kind of dynamics that you see as a Contractor that might produce a change in the contract. That's so important in the pre stage.

Look, we see in the specs you're asking for this. Right now we're hearing from our suppliers that we can get it at X [00:16:00] cost. I can only get a 10 day guarantee on this pricing. So, either we change to something that I can get more freely and easily throughout the term of the project, or we have to agree that you front load the cost of this so we can buy it right now.

That's just a small thing. But we talk so much about the headaches that come from a construction project because they're inadequate discussion with the owner and the architect for federal contracting with the contracting officer of what they need done and how they've designed it.

So now we're seeing as more folks are being asked to do design build work, we're seeing the ability to communicate change orders before they happen, more important than ever. And we're also dealing with all the fluctuation between materials, tariffs, and labor.

So to wrap up this podcast, we wanna remind our listeners: documentation, pre-planning, education of your workforce. These are the key elements to manage your change orders and making these profits, because believe me, all of us want our [00:17:00] listeners to make more profit. That's what the Contractor Success Forum is all about.

Wade Carpenter: Okay, well thank you for that. Change orders are definitely not going away anytime soon. Just rain on a job site... the contractor shouldn't just pray for sunshine and they still need to buy the rain gear and build some drainage and keep working through. And I would say with the documentation and AI today, there's a lot better ways to document many of these things. But again, change orders are a crucial part of a lot of contractors' profitability and can make or break.

So Stephen, thank you for bringing all this to us today. And again, wanna remind our listeners, Stephen's put together this nice Excel spreadsheet for you and we'll have links to get that for you in the show notes below.

We appreciate you sticking with us. We do this every single week and we appreciate it if you could like, share, and subscribe, it really helps our channel out. And we will see you on the next show.