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Change Orders: Don’t Leave Money on the Table

A key area where builders leave money on the table, and often times get taken advantage of, is changes and additions to a home.  When the plans are being developed, owners believe they know exactly what they want in their home and the price, specifications, and contracts are prepared based on those desires and preferences.

Once the drywall is up and owners can better visualize their “home,” things are not exactly as planned.  There is also the “hands-on” owner who is on the jobsite multiple times a day talking to subcontractors and adding a few plugs here, extra canned lights there, moving plumbing mechanicals, and expanding patios.  Owners simply do not understand that their “small” changes can be bigger than meets the eye and drive up expenses.

To keep from having several thousand dollars in changes that are difficult to collect, builders need to be diligent in protecting themselves, both in their contracts and their actions.

Builders must be clear with subcontractors that no additions or modifications are permitted by an owner without the builder’s prior approval.  The builder-subcontractor agreement is a good place to address this.  Otherwise, changes get made on the fly, builders receive a bill and homeowner claims they didn’t know it would cost so much or thought it was included.  To keep the peace, builders often relent and absorb the charges.  Having subcontractors acknowledge in writing the builder’s change order procedure can save dealing with unplanned expenses or shift the expense back to the subcontractor.

The builder/owner construction agreement should include a term that the owner may not issue directions to subcontractors.  This is good on paper, but needs to be emphasized to the owner time and again.  Without this definitive understanding, regardless of the contract terms, a builder can quickly lose control of a project and its costs.

The construction agreement also needs to clearly state that all changes and add-ons are subject to change orders and that the owner will be charged the out-of-pocket cost, plus overhead and profit.  Prior to performing the addition or modification, the builder should have the change order signed and immediately bill the owner and collect for those charges.  Adding an administrative fee to each change order (yes, builders, your time is valuable in dealing with this) will help keep owners focused and enables the builder to address changes as a group of changes, rather than piecemeal.

Additionally, if there is more than one owner, the builder needs to know who can approve the change order.  If more than one individual owns the real estate and signed the construction agreement, without a clause in the construction agreement permitting less than all of the owners to authorize, the builder puts himself at risk for being able to collect.

From a practical standpoint it is sometimes easy to overlook small expenses here and there.  But keeping an owner from taking advantage of builder freebies and recouping expenses that the builder is due under the contract can be the difference between a good bottom line and a great one.

For more information about contracts or any construction-related legal matter, please contact attorney Shannon Frank at sfrank@KDDK.com or (812) 423-3183, or contact any member of the KDDK Construction Law Practice Team.

About the Author

Shannon S. Frank

Shannon S. Frank, a Partner at Kahn, Dees, Donovan & Kahn, LLP (KDDK), in Evansville, Indiana, has more than 20 years’ experience in the practice of business law, construction law, estate planning and probate administration, health care law, and real estate law. Shannon takes prides in giving exceptional service to her clients, recognizing that relationships with clients play a significant and essential role in providing tailored and comprehensive legal advice.