A change order is a formal, signed amendment to the original construction contract that modifies the scope of work, cost, or schedule. It documents what is being added or removed, the cost impact (positive or negative), the timeline impact, and requires signatures from the builder, owner, and general contractor. Change orders can stem from owner requests, unforeseen conditions discovered during construction, design revisions, or material substitutions.
Change orders are critical because they protect all parties. Without a change order, scope creep can erode margins, disputes over responsibility arise, and draws become contested. Each change order should specify the work in detail, include a clear cost, identify any schedule impact, and explain how it affects the overall budget and timeline.
Most residential construction loans allow change orders up to a threshold (often 5-10% of total loan amount) without lender approval, but large or repeated change orders trigger a loan modification or require new appraisal. The most common discipline failure in residential construction is drawing on contingency for scope changes instead of issuing a change order, which obscures the true cost of the project.