How to Mitigate Change to Defend Against Soaring Cost and Schedule Overruns
Change orders remain a major source of frustration and one of the biggest challenges within the construction industry due to the time and cost incurred. In fact, studies have shown that the average cost overrun from change orders is 11-15% of the original contract value in large projects. Meanwhile, the average schedule overrun is 10-20% of the original project timeline.
Proper change order management enables teams to mitigate the significant costs and schedule disruptions in construction. Still, for many construction companies, effective change order management is a major paint point. Preventing change orders from occurring and managing them when they occur requires a cultural and procedural shift.
Nonetheless, through the proper use of technology in the construction industry, good communication and better data collection practices, construction companies can reduce the amount of time and money wasted on change orders.
Calculating the True Cost of Change Orders
First, it’s important to grasp the full cost impact of change orders. While change orders are sometimes unavoidable, it’s difficult for teams to accurately estimate their impact. On average, change orders result in a 30% loss of productivity. Understanding the true cost–direct, indirect and consequential–can help construction teams to minimize the effects.
Direct costs are costs that are directly affected by the change order. Typical direct costs include materials, labor, equipment and other expenses relating to the change. These costs include some less obvious expenses like the cost to redesign the structure, cost of communication with crew and engineers, cost of extra set up and clean up, etc.
Indirect costs include overhead. Indirect costs can be a fixed or variable part of the construction project, depending on a business’s accounting practices. In cases when the indirect costs are a percentage of the overall job, the more expensive the job becomes, the higher the indirect costs are as well.
Consequential costs are costs that are incurred because of the timing of the change order. By diluting labor power, reassigning supervision and causing interference from seasonal weather, change orders can slow down efficiency and cost companies in ways that are very difficult to measure.
Primary Causes of Change Orders
The primary causes of change orders include:
- Owner-initiated changes: Mostly unavoidable
- Design errors and omissions: Often manageable with better oversight, tools and processes
Tracking the root causes of change orders enables construction companies to identify patterns and troubleshoot issues.
Problems with the Traditional Change Order Management Model
Much of the extra expenses associated with change orders comes from the manner in which they are handled by the construction company. Traditional management practices that focus on more of a reactive approach rather than proactive create almost as many problems as they fix. Companies that are committed to the traditional change order model often experience many of the same problems again and again.
Change Orders Costs Increase as the Project Excels
The cost of a change order is directly correlated to the project phase when the change order is initiated. For instance, changes that come up in the design phase are much less expensive changes that surface in the construction phase. With a better proactive approach to change order management starting in the earliest planning phases, projects are less likely to experience significant cost and schedule overruns.
Lack of Data
When a change order is requested, the project manager must estimate the impact on the project’s overall time and budget. Overestimates and underestimates are common in traditional change order management because there is a lack of real data to support their analysis. For project managers, without the right access to data and information, they are only further eating into a project’s profits.
The Increasing Importance of Effective Change Order Management
Across the construction industry, project risk is increasing. Timelines are becoming tighter, stakeholders are adding more pressure and both materials and labor costs are increasing. Construction teams cannot afford to rely on traditional change order management for their projects.
As mentioned, while some change orders can’t be avoided, especially owner requested changes, a robust management system can help minimize the impact of change. A defensive strategy from the project outset can help prevent changes from occurring, while an offensive strategy that focuses on efficiency can help manage changes when they happen.
Effective change management is a matter of practice. Construction companies that frequently use these practices become better at change management while simultaneously reducing the number and effect of change orders in every job. Companies that best handle change management are companies that have ingrained these practices into every employee, at all staff levels.
Strategies for Managing Change in Construction
There are many strategies for managing change in construction. Nevertheless, here are a few of the best modern tactics and strategies:
Better Designs and Visualization
Building information modeling (BIM) technology is a model-based process that provides insight to architects, engineers and designers as they plan construction of buildings and infrastructure. BIM helps in the design phase by providing more accurate visualizations before the building phase begins.
Furthermore, BIM can also be bridged into the field during construction. While changes that occur during actual construction will be significantly more expensive than in the design phase, BIM can help provide a more accurate analysis of the total impact. BIM integrated tools also provide better data during the construction phase, which enables project managers to better predict how changes will affect the overall project.
Improve Collaboration in the Design Phase
Often construction projects lack collaboration, particularly in the design phase. Excluding members of the team in the early phases can lead to oversights and errors that reveal themselves later in the project. Taking a fragmented approach during the design phase can reduce efficiency as more members join the project later.
Design projects involve the coordination of complex systems, and bringing teams together takes an enormous effort. Involving more people at an earlier phase can firm up designs and plans before the construction phase of the project begin, helping to prevent errors and omissions. Team members to consider involving at an early phase can include suppliers, contractors and subcontractors, project board members, lead consultants and even end users of the project.
Collaborating from the outset helps in a variety of ways. Collaboration improves clarity, promotes problem-solving and teaches the team the how of working together. Often, building and design projects bring together groups of people who have not worked together previously. Establishing a group mentality from the outset makes working together easier as the project continues.
Improve Communications Throughout Construction
Good communication is essential for large construction projects. Many companies now use specialized software to link teams of unconnected parties and promote collaboration throughout the design and construction process. Adoption of such software facilitates better communication across the board. This ensures that everyone is up to date on the latest developments. If a change occurs, all members of the team are alerted and can participate in the discussion, thus preventing miscommunications or missed information that can lead to even more project delays.
Specialized software can be used to link involved parties on the jobsite or where ever they happen to be. This is crucial during the construction phase when different members of the team are working from different sites and environments. Increased documentation of the change also improves the ability to manage future change and consequential costs.
Cloud-based document management adds visibility and accountability to a project. Electronic communications management also enables companies to get rid of manual tracking of change orders via Excel, email and paper. This ensures that documentation is available instantly to anyone who needs it and speeds up the spread of information to ensure maximum efficiency.
Empower Better Change Order Management With More Data
Successful change management is often a decision making process. With more information and data available, project managers are better able to minimize the cost and schedule impact when a change order occurs. As mentioned, BIM and communications software improves data collection efforts.
Robust data collection and data management come back to the use of proper technology and software. Companies that use multiple disjointed applications for managing their data run the risk of missing important pieces of information. With all of the information available through one organizing source, project managers are able to see the sum total of data available and make informed decisions based on that information. In order for the data to be made available to project managers, everyone must use the same software to share their information.
Improving Change Order Management Requires an Organizational Shift
It should be clear that there’s not one thing that construction companies can do to reduce costs from change orders. Instead, the sum total of many changes can create better efficiency, more clarity and reduced incidents of change orders overall. Companies that upgrade their software, improve communications and develop best practices for managing the design and construction process will find success as they reduce their costs and impact from change orders.