It’s a fact: the construction environment is constantly changing, which leaves general contractors at risk of cost overruns caused by rising costs, labor shortages and supply chain issues. While some factors are out of the general contractor’s control, this risk can be drastically reduced through measures to secure project costs early, prevent excessive change orders and maintain subcontractor relationships.

Lock in costs early and protect against escalation

In an escalating market, locking in labor and material costs early is crucial for reducing risk. Once a general contractor establishes budgets for key trades with the owner, it’s in the project’s best interest to issue contracts with subcontractors early to secure costs and protect against future price increases. General contractors should also thoroughly review subcontractor and supplier contracts for information regarding price increases, deadlines for acceptance, deadlines for ordering materials and more. If general contractors do not have price escalation protection in their contracts with the owner, they’re at risk for price increases from their subcontractors.

Securing costs early offers a level of protection in a volatile market, but if the project scope and design is not 100% finalized, it will need to be bought out through the change order process.

While not all change orders are budget killers, it’s important to understand what causes change orders, the role they play in creating risk and how you can proactively mitigate this risk.

Proactive design management

 Once contractors are brought in early to lock in material pricing, it’s important to validate costs as the design continues to progress and become finalized. If contracts are awarded at the 100% design development stage, general contractors must ensure that they get fair pricing on updates made in the 50% construction drawing set and so on. To do this, general contractors need a tight process to distribute these updates, hold awarded subcontractors accountable for pricing deadlines and, most importantly, review and validate the change orders received from subcontractors to ensure they contain fair and accurate pricing.

As projects become more and more collaborative and iterative, the risk in this process only gets magnified. As project design gets faster and faster, things like design deficiencies, poor collaboration and missed scope can often occur.

A better change order process improves subcontractor relationships

Bringing subcontractors in during design can help mitigate against escalation, rising material costs and prevent expensive change orders; however, the labor shortage is another risk general contractors must address. When the market is busy, subcontractors have many more projects to bid than they can possibly take on, so it’s essential that general contractors maintain relationships with their trade partners to ensure they have maximum bid participation and favorable pricing. Stated simply, general contractors can reduce risk by being the general contractor that subcontractors want to work with, and how general contractors manage change orders is a major factor.

While all change orders cannot be prevented, managing the change orders that do occur is an important part of controlling risk on a project. Change orders might be a challenge for general contractors, but they are an essential part of every subcontractor’s revenue and vital to their financial health. When the change order process is disorganized or inefficient, subcontractors are at risk of disrupting their cash flow or experiencing major financial problems. Making sure that valid change orders are approved, processed, and paid in a timely manner can go a long way with maintaining subcontractor relationships. A well-functioning change order process reduces risk for owners by providing transparency about where project costs stand and also improves the experience (and cash flow) for subcontractors.

The construction industry is experiencing major changes, including material and labor shortages, but that doesn’t mean general contractors have to assume all the risk. By taking a proactive approach to communication and collaboration during design and construction, the entire project team can reduce their risk.