Definition
A change order is a written modification to an existing construction or renovation contract that changes the scope of work, price, schedule, or specifications after the project has started. Change orders are normal in real estate projects, but unmanaged change orders are one of the fastest ways to blow a budget and miss a timeline.
What a Change Order Should Include
- Description of change: what is being added, removed, or revised (with location/unit numbers).
- Reason: unforeseen condition, owner request, code requirement, design revision, etc.
- Cost impact: labor, materials, equipment, overhead & profit, tax, and any credits.
- Schedule impact: added/removed days, sequencing changes, long-lead impacts.
- Reference documents: photos, drawings, RFI responses, inspection notes, specs.
- Approval: signatures (or written authorization) from owner/PM and contractor.
Common Causes
- Incomplete scope: vague Scope of Work (SOW) or missing line items.
- Hidden conditions: rot, mold, plumbing leaks, subfloor issues, electrical deficiencies.
- Code/permit requirements: inspector adds requirements midstream.
- Material substitutions: discontinued items or lead-time delays.
- Owner-driven upgrades: “while we’re in there…†improvements.
Why It Matters to Investors
In underwriting, base CapEx budgets assume a defined scope and a predictable unit cost. Change orders introduce cost volatility and timeline risk, which can reduce NOI (delayed lease-up), increase carry costs, and compress returns.
Controls That Prevent Budget Blowouts
- Bid leveling: ensure bids are apples-to-apples before award so gaps don’t become change orders.
- Clear SOW + specs: define “ready-to-lease†standards, finishes, patch/paint expectations, protection, cleanup.
- Allowances + contingency: separate known unknowns (allowances) from true surprises (contingency).
- Approval thresholds: define who can approve what (e.g., PM up to $1,000; owner above).
- No verbal changes: require written authorization before proceeding (except true emergencies).
- Weekly cost report: track original contract, approved change orders, pending change orders, and forecast at completion.
Example
During a unit renovation, the contractor discovers water damage behind the vanity. The change order proposes: replace 12 sq ft of drywall, treat/prime, replace baseboard, and repaint the bathroom wall.
- Cost impact: +$620
- Schedule impact: +1 day (dry time)
- Documentation: photos + location noted (Unit 203, bathroom vanity wall)
Once approved, the change becomes part of the contract and the project budget baseline is updated.
Red Flags
- Large “T&M†(time and materials) without backup: no labor rates, hours, or receipts.
- Markups stacked twice: subcontractor markup + GC markup not disclosed.
- Scope creep: upgrades framed as “required†without clear justification.
- Late disclosure: contractor waits weeks, then submits a lump-sum change order.