How AI Can Speed Up Construction Change Orders & Payments
Terms like “construction change order” and “change order form” are searched over 5,000 times a month in Google. Despite AIA change order forms being the standard in the construction industry, contractors are still researching how they can have the most success submitting them, because change orders are one of the biggest impacts to project profitability.
On average, profit margins are under 7% on construction projects leaving little room for making big changes that won’t be covered by owners.
While the need for contract change orders can be unpredictable, the process doesn’t have to be if it’s thoroughly covered in your contract. Software, especially AI-enabled software, is changing how GCs execute construction contracts, which is changing how they submit change orders and the profitability that results from them. AI can help ensure your change orders are submitted correctly and approved quickly.
How early should change orders be discussed?
Getting change orders approved starts before you even sign the contract. It starts in the negotiation phase with:
Airtight change order and deductive change order clauses in your contract
Over-communication with owners to understand their overall budget, including upper and lower spending limits
Fair payment terms for change orders that arise unexpectedly
Exhausting detail on what is and isn’t considered additional work on a project
We often see GC profits/fees range from 3-5% in original contracts. Owners are aware that change order profit margins tend to be higher at 15-20%. Trust, communication and fair legal terms can help bridge the gap between these two ranges when change orders are necessary, and especially when they’re not.
Unfortunately, there is not a widely agreed upon acceptable change order percentage in construction, it varies by project, so strong contracts and relationships are critical.
Lawyers are not often involved in the change order process, hence the DIY Google searches we mentioned earlier. Lawyers may be engaged later for a payment or claims dispute, but it’s often up to the project teams to determine and submit the scope of a change order based on the terms of the project contract. AI can help project teams submit a comprehensive and complete change order request, increasing the likelihood that the change order gets approved.
What Change Order Terms Should Construction Contracts Include?
Even when GCs have a great relationship with the owner, they can be reluctant to “bite the hand that feeds.” Even the most necessary change orders can feel superfluous when you want to execute on the schedule and budget you’ve promised. GCs also want to establish long-term, multi-project relationships and don’t want disagreements on change orders to impact that.
To mitigate this, GCs can rely on facts, not feelings, and ensure the facts of needing and submitting change orders are fully covered in their contract. Every general contractor agreement should include a clear protocol for change orders that answers:
What constitutes a necessary change order?
Is the GC required to maintain a log of potential COs?
Who submits the CO, how and when?
What is the allowable markup on change orders?
What are the timeline and steps of the review and approval process?
How will CO payments be handled?
In addition, the contract should cover the most common types of change orders so that discussions on these situations start before the project - and both GCs and Owners know where they stand and how they’ll be remedied:
Material price escalations
Inaccurate specifications in the original designs or contract
Ambiguous or inaccurate drawings
Unforeseen conditions at the job site, such as weather and obstructions that could not be planned for
Workers or materials that do not arrive or come late to the site
Faulty budgets and schedules
While all potential change orders can’t be accounted for, discussing the most likely scenarios will at a minimum help both parties understand how they will work together to address the unexpected.
GCs using Document Crunch start with the standard AIA Change Order Form and draft the terms in the contract to cover the above and any project-specific risks or requirements.
Directives vs Change Order vs Potential Change Orders
Most modern construction contracts allow for a Construction Change Directive (CCD) versus a Change Order. A CCD is where an owner or architect directs the contractor to go ahead and perform the work to keep a project on schedule and the CO for it will be settled later. Allowances and terms for CCDs are covered in detail in the contract.
The most efficient change order process we’ve seen is where GCs keep a Potential Change Order (PCO) log at weekly project meetings. This list is discussed and addressed with Owners in real-time so the PCOs can be considered in advance, resulting in less surprises and a quicker approval process when the CO is submitted.
How can AI help get change orders approved?
Is software and artificial intelligence necessary if the construction industry has a standard construction change order form? The 5,000 people a month searching how to get their change orders approved would say yes.
Despite the AIA standard change order template, modifications are made and some owners/GCs still use completely custom change order forms and change order clauses in contracts. Contract terms need to be carefully reviewed by lawyers and contractors alike to confirm and agree to change order terms (and ultimately protect the project fee.) AI-enabled contract management software, like Document Crunch, can scan contracts and identify change order terms and especially any “gotcha” fine print, for example, when the contract states that final settlement of all claims has to happen before COs will be signed.
AI software can also identify all timelines and processes detailed in a contract and make sure the terms complement each other - that not only are you covered if you need to submit a change order, but that you’ll get paid for it in a timely manner. AI software will make sure you don’t miss any clauses or exceptions relating to change orders, and it’ll force change order conversations during contract negotiation, making sure your project starts with fair terms and a trusting relationship with Owners.
Will AI Increase Construction Profit Margins?
This is the question we ask our team often, and we are developing our software to answer “yes” every time. Change orders, payments and profitability start with a contract. The contract has the potential to strengthen Owner/GC relationships or strain them beyond repair.
Software that optimizes, organizes and analyzes GC contracts will ultimately increase their profit margins.
Profit margins are low and payments are slow in construction. Construction cash flow is a challenge and everyone knows it. But technology will continue to give partners more confidence in the strength of their agreements and demand for good specialty contractors will require payments and change orders that are fair and timely.
If your change order process feels chaotic, incomplete, or you’re just not getting COs approved, we’d love to help. Experience how contracts that thoroughly account for change orders can impact your project profitability by filling out the form below!