How Change Orders Affect Subcontractor Cash Flow

By: Cameron Page  |  September 16, 2021

Death. Taxes. Change Orders. Some things are inevitable. On top of this, most contractors don't have an effective Change Order communication process in place, which can have a negative impact on cash flow.

That said, Change Orders don't have to be the source of doom and gloom when they're managed effectively. Below we examine the causes of the change order impact on cash flow, why the change order communication process is so important, and a few practical steps to mitigate this risk.

Let’s Start With a Definition

A Change Order is a document used in the construction industry to formally adjust the price of a contract. For example, a flooring subcontractor has a $100,000 contract and he or she is directed to work overtime one weekend. That added cost - say $5,000 - would be submitted as a Change Order Request (COR) to the General Contractor. If approved, the General Contractor would issue a signed Change Order that updates the Subcontractor’s base contract to $105,000. Now the Subcontractor can bill for the additional work.

Change Orders can occur at any point between the inception of the contract and its end date, but are usually enacted once construction is underway. While commonplace, Change Orders can be problematic for subcontractors who must take on additional work without receiving compensation until after completion of the original task. Let's dive into why this presents a huge risk.

Why Change Orders Present a Major Risk to Subcontractors

For Subcontractors, Change Orders represent direct costs for work they have done or will perform, however they cannot bill for the additional costs until their Change Order Request is officially approved and the General Contractor issues a completed Change Order. Even with written approval, a COR can sit for weeks (or even months!) without a formal Change Order executed. This means the Subcontractor has spent real money performing the work and is temporarily financing this part of the project until getting paid.

If Subcontractors are not diligent in keeping track of extra work performed and ensuring they submit CORs, they can easily blow through their profits and put their company's financial status at risk. Let's discuss why this happens.

Why Your Change Order Process Matters

It's not unusual for Subcontractors to not get paid for 10%, 15%, even up to 30% of extra work performed, and much of this lost revenue can be attributed to an inefficient Change Order process. This issue is so commonplace throughout the industry that many contractors don't even recognize that their system is majorly flawed. Some signs of a disorganized process are:

  • Using paper T&M tags to track extra work
  • Static COR Logs drafted in Excel
  • No photo documentation
  • Bad handwriting
  • Multiple back-and-forth comments and revisions from GCs

The results of poor Change Order communication are serious and can lead to the following:

  • Lost revenue from missing or incomplete paper T&M tags
  • Rejected CORs due to illegible and insufficient documentation
  • Hours of wasted administrative time compiling CORs and Change Order Logs for GCs
  • Disputes between Subcontractors and GCs

All of this disorganization creates opportunities for revenue to slip through the cracks, which ultimately results in not getting paid for work performed and negatively impacts Subcontractors' bottom lines.

What Subcontractors Can Do About it

Because of its negative impacts on cash flow, Change Order communication should be at the forefront of every Subcontractor's mind. At a minimum, Subcontractors should:

  • Diligently keep track of extra work performed
  • Submit CORs in a timely manner
  • Include detailed photo documentation

We consider these items ‘at a minimum’ because a GC may have 40 Subs on one project and the Subs who better track and communicate extra work are likely to get their change orders approved, processed and paid faster.
But for all the benefits of improving your change order communication, there’s still a lot of work on your project teams to get it done. In many ways, it’s just doing your current process more thoroughly, and often there isn’t enough time to do that.

That’s Why There’s Clearstory

Clearstory offers a faster solution that accelerates the Change Order process by automating manual tasks, streamlining organization and improving communication with GCs. Clearstory customers have achieved 75% faster processing and ZERO lost revenue from T&M work by switching to Clearstory.

Where does your company stand? If you’re dealing with a disorganized Change Order process, the cost impacts are likely adding up. Contact Clearstory to learn more about how you can accelerate the Change Order process.

Cameron Page
Cameron Page

Cameron leads Clearstory as the founder and CEO. After 10 years as a Project Manager at Devcon, a leading design-build GC, he knew there should be a better way to track and communicate on Change Orders. He started Clearstory with a mission to help the entire construction industry get extra work processed and closed faster in order to reduce risk, waste less time, and strengthen relationships.

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Contact us to schedule a 30 min call to see if Clearstory is right for you and your team.