A formal modification to construction scope, cost, or schedule.
A change order is a formal written modification to a construction contract — changing the scope of work, the cost, the schedule, or all three. Change orders are inevitable on most projects, but how they're managed is the difference between projects that finish on budget and projects that blow through every reserve.
Change orders happen for several reasons. Owner-requested changes — the borrower decides to upgrade finishes, add a feature, or modify the design. Unforeseen conditions — soil problems, hidden structural issues, code requirements not anticipated. Errors and omissions — the original drawings missed something. Scope clarifications — interpretation differences resolved through formal documentation.
A clean change order process documents what changed, cost impact (additional or credit), schedule impact, and required approvals. The GC submits the change order; the owner approves (with input from architect); the lender approves on construction loans where the change exceeds threshold amounts. Without that approval chain, work can proceed without funding — creating loan budget shortfalls.
Lender approval of change orders is critical on construction loans. Most loans require lender consent for change orders above a threshold (typically $10–25k on SFR, $50k+ on commercial). Below the threshold, the borrower can absorb minor changes into contingency. Above the threshold, the change has to be approved — including any required increase to the loan budget if contingency is exhausted.
Sophisticated borrowers manage change order risk proactively. Conservative initial budgeting with realistic contingency (8–10% on most projects). Tight scope and specifications upfront — vague drawings produce more change orders. Quick decisions on owner-requested changes — delays cost money. GC accountability for items in their original scope — change orders shouldn't be used to fix GC mistakes. The discipline pays off in projects that finish near budget.
| Original construction budget | $485,000 |
| Original contingency (8%) | $38,800 |
| Change orders during build: | |
| CO #1: Soil remediation (unforeseen) | $18,500 |
| CO #2: Owner finish upgrades | $22,000 |
| CO #3: Code-required egress addition | $8,500 |
| CO #4: Owner-requested deck addition | $14,500 |
| Total change orders | $63,500 |
| Contingency available | $38,800 |
| Contingency exhausted; deficit | $24,700 |
| Borrower out-of-pocket | $24,700 |
A formal written modification to the construction contract — changing scope, cost, schedule, or all three. Documents the change and the cost/schedule impact.
Depends on the cause. Owner-requested changes are borrower-funded. Unforeseen conditions and code requirements are typically borrower-funded (from contingency). GC errors and omissions are typically GC-funded unless the contract says otherwise.
On construction loans, yes — above the threshold amount specified in the loan documents (typically $10–25k on SFR, $50k+ on commercial). Below the threshold, the borrower can absorb into contingency without lender consent.
Detailed initial design and specifications, conservative contingency budgeting, fast decisions on owner-requested changes, and GC accountability for items in their original scope.
10–20% on top of materials and labor cost. Some contracts cap the markup; some are open-ended. Negotiate the change order markup structure in the original GC contract — not after change orders start.
Matrix structures construction loans with change order approval processes that respect the project's pace. Reasonable thresholds, fast decisions.
