The Anatomy Of A Change Order: Understanding Budget Shifts In Commercial Construction

Written By Meagan Petty

A Realistic Anonymized Budget Shifts

Consider a hypothetical commercial construction renovation with an original construction contract of $500,000. The project moves into demolition, and the contractor discovers that an existing wall scheduled to remain contains an outdated electrical system that cannot safely support the new equipment shown in the plans. The owner and design team determine that the electrical system must be replaced and that additional wall repairs will be required after the work is completed. This type of unforeseen existing condition is recognized as a source of construction changes. (Learn- ACD Operations)

The contractor prepares a change proposal documenting the additional work. The budget shifts are as follows: $18,000 for electrical and modifications, $6,500 for additional demolition and disposal, $4,000 for wall reconstruction and finishing, and $3,500 for related project overhead and coordination, for a total proposed change of $32,000. (Construction Change Orders: How They Work & What They Cost, 2026) The revised contract value would therefore become $532,000, assuming the owner approves the full amount. A correctly documented change should identify the scope, cost impact, and any effect on the contract schedule. (AIA Contract Documents)

The $32,000 increase is not necessarily evidence that the contractor estimated the first project incorrectly. The first estimate was based on the information available when the contractor priced the contract. Once concealed conditions are exposed, the actual scope can differ from what was reasonably anticipated. Construction Industry Institute research recognizes that contractors may encounter interferences, construction ability issues, or existing conditions that change the planned work. (Construction Institute)

Where Does The Extra Money Actually Go?

A change order is more than a simple lump-sum number. The price should reflect the actual effect of the changed work. Depending on the contract, that can include additional labor, materials, equipment, subcontractor cost, supervision, overhead, and profit. (FAIA, 2023) Changes can also affect work not directly changed by creating disruptions, requiring resequencing, or adding coordination requirements. (Learn- ACD Operations)

For example, replacing an electrical system may require an electrician for several additional days, but the cost does not necessarily stop with the electrician's labor. Additional demolition, material procurement, inspections, patching, painting, supervision, and coordination may all be connected to the change. If the work affects the schedule, the project may also require an adjustment to the contract time. (Learn- OCD Operations)

Why Change Orders Happen

Not every change order results from a mistake. Owners may change their minds about finishes, equipment, layout, or functionality after construction begins. Design teams may discover concealed conditions they could not reasonably identify before demolition; weather, coordination issues, and other circumstances outside a contractor’s control can create opportunities for additional costs later; and insufficient investigations of existing conditions can create opportunities for additional costs later. CII Research finds poor scope definition as a major contributor to projects exceeding their budgets. (Construction Institute)

How Owners Can Avoid Unnecessary Change Orders

The best time to reduce change orders is before construction begins. Owners should make as many major decisions as possible during design, including layouts, finishes, equipment, materials, and operational requirements. A thorough review of drawings and specifications can also uncover conflicts before contractors mobilize and begin installation work. Better scope definition gives estimators and contractors a more complete picture of what they are being asked to build. (Construction Institute)

Existing buildings deserve particular attention. Before renovating an occupied or older commercial property, owners should consider what is hidden behind walls, above ceilings, beneath floors, and around existing mechanical, electrical, and plumbing systems. While no investigations can eliminate surprises, additional surveys and selective exploratory demolition can reduce unknowns that surface after construction begins. CII Research precisely identifies unforeseen conditions and design issues as potential sources of project changes. (Construction Institute)

‍Don’t Approve Changes Without Comprehending The Impact

When a change is proposed, owners should look beyond the bottom-line dollar amount. Ask what work is changing, why it is necessary, what documentation justifies the price, whether there are alternatives, and whether the change affects the timetable or other trades. AIA Guidance recommends evaluating the necessity of change, alternative methods, compensation, schedule effects, or other portions of the project, and additional costs before proceeding. (The American Institute of Architects)

Build a Contingency Into The Budget

Even excellent planning cannot eliminate every construction surprise. Owners should consider carrying an appropriate contingency based on the project’s type, age, complexity, design maturity, and known risks. A contingency is not money automatically owed to the contractor: it is a monetary buffer that lets the owner address legitimate unforeseen costs. Without immediately putting the entire project budget in jeopardy. (FAIA, 2023) AIA Guidance specifically recommends including a contingency in the project budget for reasonably anticipated changes. (The American Institute of Architects)

For example, an owner with a $500,000 renovation who sets aside a $25,000 contingency creates a buffer for unanticipated events. If a legitimate $12,000 change occurs, the owner may still have $13,000 available for another unforeseen issue. Without that reserve, even a relatively modest change can force the owners to cut scope, find additional funding, or make difficult decisions late in the project. (The American Institute of Architects)

The Bottom Line

Change orders are not automatically a sign of poor construction management. Some result from decisions made after construction begins or conditions that could not reasonably be known beforehand. The real problem is uncontrolled change, changes that are poorly documented, approved without appreciating their consequences, or allowed to build up without consistent budget tracking. Research from the Construction Industry Institute shows why controlling changes matters: they can affect cost, schedule, productivity, and overall project performance. (Construction Institute)

For owners, the goal shouldn’t necessarily be no change orders. Instead, the goal should be fewer surprises and better-controlled changes. Thorough pre-construction planning, clearly defined scope, realistic contingencies, careful review of existing conditions, and format records can make the difference between a manageable $32,000 budget adjustment and a project that slowly drifts thousands, or even hundreds of thousands, of dollars beyond its original plan. (AIA Contract Documents)

Final Thoughts

A change order is ultimately a story behind a single number; it explains the cause and documents the work, qualifies the impact, and gives the owner the information needed to make an informed decision. When owners and contractors treat change orders as a needed, structured part of project management rather than an unexpected confrontation, budget shifts become easier to understand, evaluate, and control.

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Meagan Petty
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