Change Order Management for Residential GCs: How to Handle Scope Changes Without Destroying Relationships or Margins

“Can we just add one more thing?”

Six words that have destroyed more contractor margins than any economic downturn.

In residential construction, scope changes are inevitable. Homeowners change their minds. Hidden conditions appear. Design issues surface during construction. It’s part of the business.

The question isn’t whether you’ll face change orders. It’s whether you’ll manage them profitably—or let them eat your margin bite by bite.

The Change Order Profit Leak

Most GCs dramatically underestimate how much money they lose to poorly managed scope changes.

The obvious costs:

• Unbilled work: “I’ll just do this one for free”
• Underbilled work: “This is only worth a couple hundred dollars” (when it’s worth $800)
• Delayed billing: Work done, never invoiced

The hidden costs:

• Schedule disruption: Changes interrupt workflow
• Rework: Changes require redoing completed work
• Administrative time: Discussing, pricing, documenting
• Relationship friction: Arguments over what was “included”

The math:

Typical $200,000 residential project:

• Average of 8-12 change orders
• Average unbilled/underbilled amount per change: $200-500
• Total margin leakage: $2,400-6,000 per project

At 15% profit margin, that $200,000 project should yield $30,000 profit. $6,000 in change order leakage = 20% profit reduction.

Now multiply that by your annual project count.

The Change Order Spectrum

Not all changes are equal. Understanding the types helps you manage them appropriately.

Type 1: Client-Requested Changes

The homeowner decides they want something different.

• “We’ve decided we want the kitchen cabinets in a different style”
• “Can we add recessed lights in the bedroom?”
• “What if we moved that wall?”

Your position: This is additional scope. Price it, document it, bill it.

Type 2: Unforeseen Conditions

You discover something that couldn’t have been known.

• Termite damage behind walls
• Inadequate existing framing
• Underground utilities not shown on survey

Your position: This is outside your original scope. Price it, document it, bill it. (Your contract language matters here—see below.)

Type 3: Design Errors/Omissions

The plans were incomplete or incorrect.

• Missing structural details
• Conflicting dimensions
• Unbuildable conditions

Your position: If you bid from incomplete plans, your contract should address this. Typically billable, but depends on your contract language.

Type 4: Your Errors

You missed something in your estimate, or your team made a mistake.

• Forgot to include a line item in bid
• Built something incorrectly

Your position: This is on you. Fix it at your cost. Learn from it.

Type 5: Gray Area Changes

The scope was ambiguous.

• “Finish carpentry” means different things to different people
• “Standard finishes” is interpreted differently
• “Per plan” when plan is vague

Your position: This is where relationships get tested. Clear original scopes prevent these.

The Prevention Strategy

The best change order is the one you don’t need.

Clear Scope Documents

Your original contract should include:

Detailed inclusions: Not just “kitchen renovation” but:

• Demolition of existing cabinets, countertops, and backsplash
• Installation of new cabinets (per selection)
• Installation of countertops (per selection, up to $X allowance)
• Installation of backsplash (per selection, up to $X allowance)
• Plumbing hookups for existing fixture locations
• Electrical for existing outlet locations
• Paint (walls and ceiling, two coats, contractor to supply)

Explicit exclusions:

• Appliances (supplied by owner)
• Window treatments
• Furniture or decor
• Landscaping
• Items not specifically listed above

Allowances with limits:

• Countertops: $4,000 allowance (material only)
• Tile backsplash: $800 allowance (material only)
• Lighting fixtures: $1,200 allowance

Assumptions:

• Existing framing is sound and code-compliant
• No hazardous materials present
• Existing electrical service adequate
• Standard drywall behind existing finishes

Change order clause: “Any work not specifically described in this contract, or any changes to the described work, will be addressed via written change order before work begins.”

The Pre-Construction Meeting

Before starting work, walk through the scope with the client:

• Review every line item
• Confirm understanding
• Identify any questions or concerns
• Document the conversation

Purpose: Surface misunderstandings before they become disputes.

The Decision Deadline

For allowance items and selections:

• Set deadlines for decisions
• Communicate schedule impact of delays
• Document all selections in writing

Purpose: Prevent mid-stream changes driven by last-minute decisions.

The Change Order Process

When changes do occur (and they will), follow a consistent process:

Step 1: Identify

Recognize when something is outside original scope.

The test: Would a reasonable person reading our contract expect this to be included?

If you’re unsure, it’s probably a change order.

Step 2: Document

Before any work begins:

• Describe the change in writing
• Reference the original scope (what was included)
• Explain why this is additional (what’s different)

Step 3: Price

Within 24-48 hours:

• Labor cost (hours × loaded rate)
• Material cost (actual + markup)
• Subcontractor cost (if applicable)
• Equipment cost (if applicable)
• Overhead allocation
• Profit margin

Don’t lowball to avoid conflict. Price fairly. If the client doesn’t want to pay fair price, they can decline the change.

Step 4: Present

In writing, clearly state:

• Description of change
• Cost impact
• Schedule impact
• Deadline for decision
• Impact of delayed decision

The format:

CHANGE ORDER REQUEST #[X]

Project: [Address] Date: [Date] Requested By: [Client / Unforeseen Condition / Design Issue]

Description of Change: [Clear description of what’s changing]

Reason for Change Order: [Why this is outside original scope]

Cost Impact:

Schedule Impact: [X] additional days

Decision Required By: [Date] If not decided by above date: [Schedule impact]

For approval, please sign below:

☐ Approved as presented ☐ Declined – do not perform this work ☐ Need more information (specify):**__**

Client Signature: ****_**** Date: ___

Step 5: Wait

Do not begin change order work until written approval is received.

No exceptions.

“She said it was okay on the phone” isn’t written approval. “He nodded when I explained it” isn’t written approval. “I figured they’d want it done” isn’t approval at all.

Step 6: Execute

Once approved:

• Document the approval
• Perform the work
• Track actual costs (for your records)
• Include in invoicing per payment terms

Step 7: Reconcile

Update project records:

• New contract total
• Revised schedule
• Updated scope document

Pricing Change Orders

This is where many GCs leave money on the table.

The Time Trap

“This will only take 20 minutes.”

Reality check:

• 20 minutes of work
• 10 minutes discussing with client
• 15 minutes writing up change order
• 10 minutes getting materials
• 10 minutes coordinating with other trades
• 5 minutes documenting completion

Total: Over an hour of actual time for “20 minutes of work”

The Minimum Charge

Every change order should have a minimum charge that covers:

• Administrative time
• Small material costs
• Disruption to workflow

Suggested minimum: $250-500 depending on your market

“Adding one outlet” isn’t a $50 change order. It’s a $300 change order minimum.

The Markup Structure

Change order work should carry the same margin as original work—or higher.

Rationale:

• Changes disrupt workflow
• Changes require administrative overhead
• Changes often require premium material procurement
• You didn’t have the chance to compete for this work

Typical change order markup:

• Materials: 20-30% (same as original)
• Labor: 50-65% markup on cost (same as original)
• Subcontractor: 15-25% (same as original)

Some GCs add a 10-15% premium on change orders to account for disruption. This is defensible if disclosed upfront.

The Schedule Cost

If a change delays the project:

• Extended overhead is a legitimate cost
• Client should understand this impact
• Include in change order pricing

Example: Change requires 5 additional days. Your daily overhead: $400 Schedule cost: $2,000 (in addition to direct costs)

Handling Common Scenarios

”This Should Have Been Included”

Client claim: “I assumed this was part of the price.”

Response:

1. Reference the scope document
2. Show what was included and excluded
3. Acknowledge the confusion professionally
4. Maintain that it’s additional work
5. Offer to price it fairly

Script: “I understand the confusion. Let me show you what our contract says… As you can see, [item] wasn’t in our original scope. I’d be happy to add it—let me put together a change order so you can see the cost and decide if you’d like to proceed."

"Can’t You Just Do It?”

Client request: “It’s such a small thing. Can you just add it in?”

Response:

1. Acknowledge the request
2. Explain the cost (even if small)
3. Offer formal change order or polite decline

Script: “I hear you—it does seem small. But I’ve learned that small changes add up, and if I don’t track them carefully, I lose money and can’t stay in business. Let me write this up quickly—it won’t take long, and we’ll both have it documented."

"That’s More Than I Expected”

Client reaction: “Your price seems high for this change.”

Response:

1. Walk through the pricing
2. Explain each component
3. Offer alternatives if available
4. Hold firm on fair pricing

Script: “Let me break this down for you… [explanation]. I’ve priced this the same way I priced the original project—fairly, with a reasonable margin. If you’d like, I can look at alternatives that might cost less. What I can’t do is perform work at a loss."

"I Never Approved That”

Client claim: After work is done, client denies approval.

Response:

1. Reference the signed change order
2. If no signature exists, acknowledge the gap
3. Negotiate resolution

The lesson: Never skip written approval. This is exactly why the process exists.

The Documentation System

The Change Order Log

Track all changes on every project:

The Project File

Keep in one location:

• Original contract with scope
• All change orders (approved and declined)
• Client communications about changes
• Photos documenting conditions

The Post-Project Review

After every project:

• Total change order value
• Change orders by type (client request, unforeseen, etc.)
• Margin on change orders vs. original work
• Lessons for future scoping

The Bottom Line

Change orders are not the enemy. Poorly managed change orders are the enemy.

When handled professionally:

• Changes become legitimate profit opportunities
• Clients understand what they’re paying for
• Relationships stay strong
• Schedules adjust appropriately
• Documentation protects everyone

When handled poorly:

• Margins erode invisibly
• Resentment builds on both sides
• Disputes arise months later
• Reputation suffers

The system isn’t complicated. Document the original scope clearly. Identify changes promptly. Price them fairly. Get written approval. Execute professionally.

Every change order is a small contract. Treat it that way.

Need help implementing change order systems in your business? Book a free 20-minute strategy call to discuss your specific situation.

Related Reading:

• Estimating for Residential General Contractors
• Client Communication for Residential GCs
• Project Management for Residential GCs