Compared to 2019, the volume of change orders in construction decreased for both home building and smaller construction projects. While across the board change order amounts decreased, there were regional differences regarding the total amount of change orders per project and average amount per change order. In our analysis, we also found that projects with higher price points used more change orders of higher average value than lower priced residential construction projects. Home builders who use more change orders also have higher average profit margins per project than their counterparts.
See below for our full findings on how change orders in construction were used in nearly 30,000 US residential construction projects from 2019-2021.
Small construction projects (projects priced below $250K) saw a 20.5% decrease from 2019 to 2020 in the average number of change orders used per projects. Following the same trend to a lesser degree, home building projects used 13.6% less change orders per project in 2020 compared to 2019. It’s too early to tell if these decreases for projects large and small is a blip caused by the effects of the pandemic or a larger trend of projects using less change orders.
Regionally change order amounts differed for home builders and small construction contractors
The average amount per change order used in home building projects decreased from 2019 to 2020 for homes built in the Northeast, Midwest, and South. New homes built in the West, however, saw nearly a 46% increase in the average amount per change order used. In 2019 the highest average change order amount was $9,066 for homes built in the South but in 2020 the highest average change order amount came from homes in the West at $12,610 per change order. The availability of land and types of homes being built could have some effect on regional disparities for average change order amounts, but the year-over-year disparities between regions could be partially attributed to the effects of the pandemic impacting regions differently.
The overall change order amount used per home building project decreased an average of 34.9% across the US from $44,344 per project in 2019 to $29,251 in 2020. The biggest decrease, 45%, occurring in home building projects in the South which went from an average of $46,433 in 2019 to $25,550 in 2020. Home building projects in the Midwest had the lowest change order amounts per project in both 2019 and 2020. Notably homes built in the West saw their overall change order amounts decrease while their average cost per change order increased.
For smaller construction projects, projects priced under $250K, the change order amounts used varied by region with projects in the West using $35,832 of change orders in 2019 down to projects in the Northeast using $11,044 of change orders. The change order amounts in projects decreased across the US an average of 26% from $21,234 per project in 2019 to $16,793 in 2020. Projects in the South saw the biggest decline, a 44.7% decrease, from $11,279 in change orders per project in 2019 to $6,238 in 2020, the lowest amount of any region in 2020.
For smaller construction projects, the average amount per change order varied by region across the US with projects in the West having average amounts nearly five times the amount of similar-sized projects in the Northeast and South. From 2019 to 2020, these amounts varied by region with average amounts decreasing for small construction projects in the Northeast, South, and West but rising for projects in the Midwest.
Larger priced projects utilize more and higher priced change orders in construction
When analyzing change orders in construction based on project price points, the average number of change orders used increases as the project price point increases. Residential construction projects priced between $250K-$500K used an average of 6.3 change orders per project, more than double the average number of change orders used on projects priced below $250K. Projects priced higher than $500K use more change orders but they increase at a slower rate. For instance, projects priced between $500K and $1M only used 29.2% more change orders in construction than projects priced between $250K and $500K.
Projects using fixed price, also known as lump sum contracts, and open book, or cost-plus contracts, have similar change order usage up to the $500K price point. After that open book projects use fewer change orders than fixed price projects for projects priced between $500K-$1M but more than them for projects costing over $1M.
Like the number of change orders used in a project, as the price point increases the average amount of each change order used in a project increases. The average amount per change order for projects priced between $250K-$500K and projects priced above $1M are nearly double the average of projects priced below $250K and between $500K and $1M respectively.
For projects priced below $1M, projects that use open book financial structures have average change order amounts $2,154 higher than similar priced projects using fixed price financial structures. But the trend reverses itself for projects priced above $1M where the change orders used in fixed price projects were on average $3,114 more than change orders used in open book priced projects.
As projects use more change orders in construction, their change order cost decreases and profit margin increases
The more change orders that are used in a residential construction project, the lower the average cost per change order. This trend is consistent for both home builders and small construction projects. The average change order amount for home building projects with just one change order is $11,180, while the average for home building projects with three change orders is $7,479 per change order. The average change order amount for small construction projects with just one change order is $4,639, while the average for projects with three change orders is $3,854 per change order.
Interestingly after three changes orders on a project, the average change order amount increases or stays flat for both home construction and smaller construction projects until six or eight change orders when the average drops off again. If contractors only use one change order on a project, they are more likely to just add multiple items to it, but as they use more change orders the average cost per change order goes down.
When home builders use more change orders, they have higher profit margins, but when small construction projects use more change orders, they increase before levelling off and then dropping off. For home builders, every incremental change order used equates to a 0.4% average increase in profit margin on a project. Small construction projects on the other hand, see an increase in profit margin for projects with one to three change orders but then profit margins decrease on projects with four to six change orders. Then, after a spike in profit margins on projects with seven change orders, the profit margins for small construction projects drop off for projects with eight or more change orders.
Notably, large and small residential projects have higher average profit margins per project if they use no change orders than if they use any number of change orders in construction. For smaller construction projects, the average profit margin per project drops from 25.8% to 22.8% if projects use change orders. Home builders see a similar decrease, 15% to 12.6%, when they use change orders in projects. These projects with no change orders are most likely projects that are fully planned out in advance and don’t encounter any deviations in scope. Without scope deviations, there are fewer inherent risks to timelines, labor shortages, material price fluctuations or delays, and other profit margin hindrances. In short, if contractors cannot fully scope out a project in advance, they should capture all changes in change orders to reap the highest possible profit margin from a project.
Where we got our numbers
CoConstruct’s construction management software helps over 100,000 building professionals manage clients and trade partners, schedule work, track financials, and more. By aggregating and analyzing the data builders input into the system, CoConstruct can identify residential construction trends and highlight emerging issues in the industry. By using and sharing this information CoConstruct is doing its part to eliminate the chaos of project management and help create rewarding experiences for both home builders and clients.