Executive Summary: The Strategic Impact of Change Order Management

Change orders and associated rework represent one of the most significant and persistent threats to profitability and schedule fidelity in the modern construction industry. Analysis of industry-wide data reveals that the cost of rework and project delays, largely driven by change orders, costs the United States construction sector approximately $177 billion annually. This figure is not a marginal expense but a systemic drain equivalent to 5% of all construction spending.

This report provides a quantitative analysis of the entire change order lifecycle, demonstrating that the financial impact of change extends far beyond the direct cost of new work. The data establishes that change orders are not merely an administrative function but a core strategic driver of project outcomes. On average, change orders account for 8% to 14% of a project’s total contract value, with distressed projects experiencing change order costs as high as 25% of the original contract.

This financial burden is compounded by severe rework costs, which consume between 5% and 9% of total project value. The administrative friction of processing these changes creates significant schedule delays, with data from Navigant Construction Forum attributing 10% to 20% of all project timeline delays directly to the change order process.

When these processes fail, the financial consequences are catastrophic. The primary cause of construction disputes globally is change in scope. In North America, the average value of these disputes surged by 40% in 2024 to an unprecedented $60.1 million, with an average resolution time of 12.5 months.

This report will demonstrate that a direct, causal chain exists between foundational process failures—such as poor information, inadequate documentation, and slow approval timelines—and these severe outcomes of profit erosion, schedule collapse, and multi-million dollar litigation.

Section 1: Benchmarking the Cost of Change

To effectively manage the financial impact of change orders, it is imperative to first establish quantitative benchmarks. The percentage of project cost attributed to change orders varies significantly across the commercial, infrastructure, and residential sectors, reflecting different risk profiles, contractual structures, and causal drivers.

Commercial Construction

In the commercial construction sector, the most widely accepted industry benchmark for the cost of change orders is an average of 10% of the total contract value. However, this average conceals a wide and volatile range. A comprehensive report from the Navigant Construction Forum provides a more nuanced range, indicating that change orders typically constitute 8% to 14% of total project costs.

For projects characterized by poor scope definition, accelerated schedules, or complex designs, this figure can escalate dramatically. On such distressed projects, it is not uncommon for change order costs to reach as high as 25% of the original contract value, effectively eroding all planned profit and threatening project viability.

A significant portion of this cost can be attributed to the design phase, long before construction begins. Analysis indicates that change orders stemming specifically from Architectural and Engineering (A/E) Errors and Omissions (E&O) account for an average of 3-5% of the total construction budget. This 3-5% figure represents a crucial “baseline risk”—it suggests that even a design considered 95% to 97% perfect will induce change orders equivalent to 3-5% of the contract value.

This data allows for a strategic separation of change order risk: a 3-5% contingency can be allocated as the unavoidable cost of design E&O, while the remaining 5-9% of change order costs (to reach the 8-14% total) are driven by more controllable factors such as owner-initiated scope creep and site management.

Infrastructure Projects

Infrastructure and public-sector projects demonstrate a similar, though slightly lower, cost profile. A detailed analysis of 50 capital projects completed by the City and County of San Francisco provides a valuable case study. Across these 50 projects, total change orders accounted for 7.0% of the original construction contract amount.

The significance of this public-sector data lies in its granular breakdown of causality:

• Design Errors and Omissions: 2.9% of the contract amount
• Client (Agency) Requested Changes: 2.8% of the contract amount
• Unforeseen Site Conditions: 2.2% of the contract amount

This 7.0% total aligns closely with the commercial sector’s 3-5% baseline for A/E errors and demonstrates the significant impact of owner-driven scope changes. The cost of change orders in the public sphere is a major focus of governmental oversight. An audit by the Chicago Office of Inspector General (OIG) specifically targeted projects where change order costs were projected to exceed 5% of the original contract price, identifying this level as a threshold for significant concern and review.

Residential Construction

The residential construction sector defies a single percentage benchmark. Costs are highly variable and correlate directly with project value, regional market dynamics, and contractor practices.

A 2021 analysis of nearly 30,000 U.S. residential projects provides specific dollar-value data. The average total dollar amount of change orders per home building project saw a decrease from $44,344 in 2019 to $29,251 in 2020. For smaller construction projects (valued under $250,000), this average total value dropped from $21,234 to $16,793 in the same period.

This data reveals extreme regional disparities. In 2020, home building projects in the West saw an average per change order amount of $12,610. In stark contrast, small projects in the South saw an average total change order value of just $6,238 per project.

The most telling statistic from the residential sector is a behavioral indicator: the more change orders a project has, the lower the average cost per change order.

• Home building projects with just one change order had an average value of $11,180.
• Home building projects with three change orders had an average value of $7,479 per change order.

This inverse correlation is not a data quirk; it is a direct indicator of administrative friction. Contractors frequently “eat” small costs to avoid what they see as a “lengthy” and time-consuming change order process for a minor sum. This is often done to maintain client relations or because the administrative cost of processing the change order is higher than the value of the change itself. Contractors then “batch” these multiple, small, unrecorded changes into a single, large change order to justify the administrative effort.

This behavior indicates that the official number of change orders is an unreliable metric for project disruption and, more importantly, that the true cost of change is systematically under-reported.

Summary of Sectoral Benchmarks

Section 2: The Root Causes of Project Change

While change orders manifest as financial and schedule impacts, they originate from a distinct set of causal factors. Understanding these root causes is essential for developing effective mitigation strategies.

Primary Causal Drivers

On a project level, change orders are typically triggered by one of the following four drivers:

1. Design Errors & Omissions: This is one of the most frequently cited reasons for change orders. It includes miscalculations, incorrect specifications in the design phase, and, critically, conflicts between contract documents, such as drawings that contradict specifications.

2. Owner-Requested Changes (Scope Creep): The Construction Institute (CII) identifies the modification of scope as the “single most common source of change on projects.” This driver includes owners who modify the project scope, design, or schedule after construction has begun, such as by adding new features, upgrading finishes, or modifying room layouts. Poor scope definition at the project’s outset is the primary reason for this.

3. Unforeseen/Latent Conditions: This is a primary driver in infrastructure and heavy construction, where it is often the “most logical and perhaps the only logical reason” for the high volume of changes. These are “latent conditions” that could not be known at the time of initial design. Common examples include subsurface discoveries (unexpected rock formations, unsuitable soils, unmapped utilities) and differing existing building components exposed during demolition and remodeling.

4. Material Substitutions: These changes are often driven by external factors beyond the team’s control. These include delays in the availability of specified materials or significant price volatility, which forces the project team to find and approve alternative, and potentially more expensive, materials.

Quantitative Factor Analysis

While the list of individual causes is long, a 2023 factor analysis published in the Journal of Engineering, Project, and Production Management provides a rigorous quantitative model for grouping them. The study analyzed 19 distinct causes and grouped them into four primary factors that collectively explain 62.33% of the variance in why change orders occur:

• Factor 1 (“Other”): 35.1% Variance Explained. This largest factor consists of external and procedural issues, including labor, equipment, material testing, new regulations, safety considerations, weather, and construction procedures.

• Factor 2 (“Contractor”): 10.5% Variance Explained. This factor relates to contractor-driven issues, including errors made by the contractor, unfamiliarity with existing conditions, poor planning, and inaccurate cost estimates.

• Factor 3 (“Consultant/Design”): 9.1% Variance Explained. This factor aligns directly with design errors and includes poor construction drawings, lack of details, errors and omissions in design, and conflicts between contract documents.

• Factor 4 (“Owner”): 7.6% Variance Explained. This factor aligns directly with scope creep and includes changes in scope by the owner, changes in design by the owner, and owner-driven schedule changes.

This analysis demonstrates that while owner, contractor, and design errors are significant, the largest single driver of variance is the “Other” category, which includes a myriad of external and procedural risks.

The “Meta-Cause”: Information and Communication Failures

The causal factors identified above—design errors, owner scope creep, contractor planning errors—are merely the symptoms of a deeper, systemic failure. The underlying disease driving the majority of change orders is a systemic breakdown in information quality and communication.

Overwhelmingly, the data indicates that 80% of all construction change orders are the direct result of “poor information”. This single “meta-cause” is the true root of the problem.

This finding is powerfully corroborated by an FMI survey, which found that 48% of all rework in the U.S. construction sector is caused by “poor communication and inadequate project data.” This “poor communication”—a “soft” problem—has a staggering “hard” cost: it costs the U.S. construction sector $31.3 billion annually.

Therefore:

• The 9.1% “Consultant/Design” factor is not simply “bad drawings”; it is a symptom of poor communication of design intent.
• The 7.6% “Owner” factor is not simply “scope creep”; it is a symptom of poor communication and definition of project scope from the outset.
• The 10.5% “Contractor” factor is not simply “poor planning”; it is a symptom of poor communication of site data and execution strategy.

This overarching failure of information management is the most critical, actionable area of focus for any organization seeking to gain control over project change.

Section 3: The Administrative Drag: Quantifying the Labor of Change Orders

A significant and often-overlooked cost of change orders is not the direct cost of the new work, but the “hidden” administrative overhead required to identify, document, estimate, and process the change. This administrative drag creates cash flow friction, introduces delays, and directly erodes project-level profit.

Time Spent Preparing Change Orders

The administrative time required to process a change order is not measured in hours, but in weeks. A 2021 case study analyzing a project that relied on manual, paper-based processes revealed a glaring inefficiency: the “Total Average Time between a signed T&M Tag and a finished Change Order Request (COR) Sent” was 24 days.

This 24-day lag represents a critical period of financial risk. This is not the approval time; this is merely the preparation time. For nearly a month, the subcontractor who performed the work has incurred real costs for labor and materials but has not even been able to submit the invoice for the change. This creates a severe cash-flow crisis for trade partners and is a primary source of friction on a project.

This 24-day timeline reflects the true complexity of the administrative task. While a U.S. DOT report gives a low-ball estimate of “1 hour per response” for filling out a change order form, this fails to capture the significant Project Manager (PM) and estimator workload. The actual tasks required for a single change order include: “the time or direct expenses it takes to analyze, discuss, estimate, manage, and present the changes,” as well as “additional drawings” and “cost analysis.”

Direct data for the “total PM hours spent on COs per project” is not readily available, as this time is often buried in general conditions. However, a reliable model can be constructed using available industry data:

1. COs per Project: According to AIA Contract Documents, the average number of change orders on a project ranges from 1.7 for a small project to 11.18 for larger projects.

2. Labor per CO: Based on the complex tasks required (analysis, estimation, documentation, presentation), a conservative estimate of 4 to 8 man-hours by a PM or estimator is required per change order.

3. Calculated Total: For an average large project, this equates to 44 to 88 total PM hours dedicated exclusively to the administration of change orders.

Labor Cost at Typical Project Manager Rates

To quantify the administrative burden, this time must be converted to a dollar value. The U.S. Bureau of Labor Statistics (BLS) reported the median annual wage for Construction Managers as $106,980 in May 2024, which equates to a base wage of $51.43 per hour. Other data sources corroborate this, with national averages for Construction Project Managers ranging from $97,768 to $100,715 per year.

This base wage is not the true cost to the employer. A “loaded” labor rate, which includes payroll taxes, insurance, benefits, and company overhead, is typically 1.75 to 2.0 times the base wage. Using a conservative 1.75 multiplier, the true, fully-loaded cost of a PM’s time is approximately $90.00 per hour.

Quantifying the Total Administrative Cost

Using the model from above and the loaded labor rate, the total direct administrative labor cost to process change orders on a typical large project can be quantified:

44 to 88 total hours × $90.00/hour = $3,960 to $7,920

This figure represents only the direct cost of the PM’s time. It does not include the consequential cost of “Disruption Days”—the unbilled daily overhead (for example, $500 per day per job) that accrues as a project is extended due to the change, even if no direct labor is being performed on that change. A single change order can cause a week of such delays, adding thousands in unrecoverable overhead.

This high administrative cost—both direct and consequential—is the economic driver behind contractor behaviors observed in the field. It explains why many contractors will “eat” any cost under a certain threshold, such as $1,000 or $2,500, because the administrative cost of processing the change order is not worth the recovery. It also explains why other contractors add flat “admin fees” of $100 to $120 to every change order to try and recoup this specific processing cost.

This widespread practice of “eating” small costs or “throwing in” minor changes means that the benchmark data is, by its nature, systematically under-reporting the true cost of change. The 10% benchmark is based on processed change orders. It does not include the thousands of dollars in “eaten” costs that are absorbed by the contractor, which are a direct and unrecorded erosion of profit.

Section 4: Approval Timeline Impact: Delays, Rejection, and Rework

The administrative friction detailed above is the direct precursor to significant project-level impacts. The delays inherent in the change order approval process create a “domino effect” that disrupts schedules, and poorly documented submissions lead to rejections and disputes. The ultimate outcome of this friction is rework, which stands as one of the largest single sources of financial loss in the industry.

Delays Caused by Poorly Documented COs & Approval Lag

The change order process is a primary driver of project delays. A Navigant Construction Forum report estimates that 10% to 20% of project timeline delays are directly attributable to change orders.

These delays are not isolated to the specific change. They create a “domino effect” or “ripple effect” that cascades through the entire project schedule. A change in one area forces the project team to re-evaluate current tasks and “reallocate resources,” which can “slow progress” on otherwise unrelated work packages.

This delay is structurally embedded in the process. The administrative lag (e.g., the 24-day preparation time) occurs before the owner’s review even begins. Furthermore, work on the change often cannot proceed until the change order is formally agreed upon and signed by both the owner and the contractor. This entire cycle—prepare, submit, review, negotiate, approve—eats into the project’s schedule float and is a primary source of schedule overruns.

Rejection Rates for Inadequately Justified COs

While specific industry-wide statistics for the percentage of COs that are formally “rejected” are not available, this lack of a simple metric is, in itself, the key finding. The process is not a simple “accept/reject” vote but a negotiation, and the true problem lies in the “disputed” or “unapproved” change order.

Qualitative data suggests this is the norm. One analysis states that it is “more common than not for change orders to be disputed, even rejected,” most notably when it is time to pay the bill.

The primary cause of these disputes and rejections is not the change itself, but the documentation and justification provided by the contractor. Key reasons for rejection include:

• “Unclear or poorly documented change orders”
• “Submitting incomplete or unclear documentation”
• Disagreements over what is “fair and reasonable” for direct and indirect costs
• The owner refusing to sign because they believe the work “should have been covered” in the original contract
• The most critical error: “Performing work without a signed change order”

This leads to the high-risk category of the “unapproved change order”—a change that the contractor must perform to maintain the project schedule, but for which the owner has not provided a signed agreement. This “unapproved” grey zone transfers all financial risk for the work to the contractor. These unapproved COs are heavily scrutinized by banks and surety firms, who will often remove them from a contractor’s financial reports, creating a significant liability on the contractor’s balance sheet. This grey zone is the primary incubator for the major disputes detailed in Section 5.

Cost of Rework & Resubmittal

Rework is the direct, physical manifestation of failed change order management and poor communication. The financial impact is staggering. According to a Dodge Data & Analytics study, rework and associated delays cost the U.S. construction industry $177 billion annually.

This $177 billion figure is equivalent to 5% of all construction spending in the United States. However, a study by Navigant suggests this 5% figure may only represent reported rework. The actual cost of rework, including unrecorded impacts, may be closer to 9% of total project value. Other studies place the high-end estimate as high as 20% of a project’s total cost.

This financial drain is mirrored by a massive loss in labor productivity. It is estimated that 30% of all work performed on construction sites is, in fact, rework.

This cost is not random; it is the end-point of the causal chain identified in this report. As previously established, 48% of all this rework is caused by “poor communication and inadequate project data”. This allows for the construction of a clear and direct causal chain:

1. Root Cause: “Poor communication” and “poor information”
2. Symptom: …lead to design errors and owner scope creep
3. Process: …which generate a high volume of change orders
4. Failure: …which, when managed poorly, result in…
5. Impact: Rework that consumes 5-9% of the entire project value

This chain demonstrates how “soft” organizational issues like communication directly translate into multi-billion-dollar “hard” costs that are absorbed by the industry.

Section 5: The Financial Precipice: Disputes, Litigation, and Profit Erosion

The failure to manage the change order process at the project level—from documentation to approval—is the single most significant catalyst for high-stakes financial and legal conflict. When the “unapproved” grey zone and the “vicious cycle” of underpricing collide, the result is a formal dispute.

Industry Data on Change Order Disputes

Change orders are not just a cause of disputes; they are the primary cause. Global consulting firm HKA, in its 2023 CRUX Insight report, identifies “change in scope” as the top cause of claims and disputes on 38.8% of projects globally. The 2025 Arcadis Construction Disputes Report corroborates this, listing “Owner-directed changes” as the number two cause of all construction disputes in North America.

The financial stakes of these disputes are escalating at an alarming rate:

• Average Dispute Value: The 2025 Arcadis report found that the average value of a construction dispute in North America surged by 40% in a single year, reaching a new high of $60.1 million.

• Rapid Escalation: This $60.1 million figure has doubled since 2021 (when it was $30.1 million) and tripled since 2019.

• Dispute Duration: The average time required to resolve these multi-million dollar conflicts is 12.5 months, while other reports place the average at 15 to 16.7 months. This represents over a year of locked-up capital, legal fees, and executive distraction.

Data from the 2025 HKA CRUX report on megaprojects provides even starker context. On average, the total sum in dispute on a project represents 33.4% (or one-third) of the entire original contract budget. The associated time extensions sought in these disputes average 65.8% of the entire planned schedule.

A $60.1 million dispute does not appear overnight. It is the direct, end-stage result of the “minor” administrative failures discussed in previous sections. It begins as a $2,500 unapproved change order that was not documented clearly. This is bundled with other unapproved changes, which creates a 24-day administrative lag and a 10-20% schedule delay. The contractor, facing a cash-flow crisis, files a claim for the cumulative cost and schedule impact. The owner, seeing only “incomplete documentation,” disputes the claim. This predictable escalation path connects the project manager’s daily administrative friction directly to the company’s existential legal risk.

Cost of Litigation and Arbitration

The $60.1 million dispute value does not include the separate, non-recoverable costs required to fight the legal battle. Arbitration, long touted as a low-cost alternative, carries significant up-front financial burdens. For a seven-figure construction claim, a contractor may be forced to pay $40,000 to $50,000 in administrative fees just to initiate the case, before any legal work begins. One study noted that tribunal costs can be as much as 700% higher than equivalent court litigation.

If the dispute proceeds to litigation, the costs are similarly high. The discovery and case preparation phase (which can last 6-12 months) alone often exceeds $150,000 for complex construction cases. These litigation and arbitration fees are a direct, additional erosion of a contractor’s capital, win or lose.

Profit Margin Erosion from Underpriced COs

The final and most systemic impact of poor change order management is the slow, steady erosion of profit margins. Poorly managed and underpriced COs are “profit killers.”

A survey on the consequences of underpricing found that “Loss of Profit” is the number one consequence, with a 75.3% importance index. This loss is self-inflicted, often caused by the contractor’s “markup fallacy.” Contractors systematically erode their own margins by applying an “arbitrary” generic markup of 5% to 10% on change orders. This common practice is financially ruinous because it fails to recover the true costs of the change. It completely overlooks the indirect administrative costs and the consequential costs, or “impact factors,” of schedule disruption.

This profit loss creates a destructive, industry-wide vicious cycle. The same survey revealed how contractors attempt to recoup these losses:

1. On “Other more profitable projects” (72.7% importance index)
2. “Through variations” (i.e., future change orders) (68.0% importance index)

This data is critical. It means a contractor who loses money on Project A (due to underpriced COs) is forced to be more financially aggressive in bidding and change order pricing on Project B to survive. This aggressive, defensive pricing on Project B then creates the conditions for the next major dispute. One firm’s failure to manage its own change order process pollutes the entire ecosystem, creating a cycle of disputes and driving up risk for all stakeholders.

Section 6: Strategic Recommendations and Conclusions

The findings of this report are conclusive: change orders are not a peripheral administrative task but a central, predictable, and high-risk feature of the construction ecosystem. The data reveals a direct, causal chain from “soft” issues like poor communication to “hard” costs that include 5-9% project value erosion from rework, 10-20% schedule delays, and multi-million dollar disputes.

Contractual & Pre-Construction Mitigation

1. Define Clear Contractual Processes: The simplest and most effective defense is to address the change order process in the original contract with “direct, detailed provisions.” This removes ambiguity and provides a clear mechanism for all parties before a change is needed.

2. Implement a Disputed Change Order Clause: This is a critical, yet surprisingly absent, clause that acts as a financial circuit-breaker. This clause should require the owner to pay a negotiated percentage (e.g., 40-80%) of the contractor’s substantiated cost estimate for a disputed change. This allows work to proceed, maintains the schedule, and protects the contractor’s cash flow, preventing a minor cost disagreement from escalating into a major schedule-delaying dispute.

3. Address the “Meta-Cause”: The “poor information” and “poor communication” that cause 80% of COs and 48% of rework must be the primary target of pre-construction efforts. This requires significant investment in collaborative planning, scope definition, and constructability reviews to ensure all parties are aligned before mobilization.

Process & Technology Transformation

1. Digitize Field Data Capture: The 24-day lag between T&M work and COR submission is a direct result of paper-based field tags and static Excel logs. Adopting digital T&M tools creates a real-time, single source of truth, shrinking this administrative delay from weeks to hours and providing the documentation needed for rapid approval.

2. Standardize Digital Workflows: A standardized process, enabled by technology, for submitting, reviewing, and approving COs ensures that all parties are aware of the potential cost and schedule impacts in real-time.

Financial Management & Cost Recovery

1. Abandon Arbitrary Markups: Contractors must immediately stop the practice of using “arbitrary” 5% to 10% markups on change orders. This practice is the root cause of systemic profit erosion.

2. Implement “True-Cost” CO Estimating: A contractor’s primary financial defense is to establish a “consistent, detailed, and logical methodology” for pricing change orders. This methodology must quantify and justify all three types of cost:

   • Direct Costs: Tangible labor, materials, and equipment
   • Indirect Costs: The administrative labor (44-88 hours per project), overhead, and supervision required to manage the change
   • Consequential Costs: The “impact factors” and “Disruption Day” costs (e.g., $500/day) that result from schedule delays and resource reallocation

A methodology that properly documents these three costs is the only way to “gain change order acceptance”, protect margins, and break the vicious cycle of underpricing and disputes.

Conclusion

The data presented in this report confirms that the failure to manage change orders with rigorous, standardized, and technology-enabled processes represents the single greatest, controllable threat to project profitability in the construction industry. The financial impacts—ranging from a 10% average reduction in contract value to $60.1 million disputes—are too significant to be managed as a low-level administrative function.

Change order management must be elevated to a core component of C-suite-level financial strategy, risk management, and operational control.