Change Order

A change order is a documented amendment to the original construction contract that alters scope, price, or schedule. In commercial real estate lending, change orders must be tracked because they affect the loan budget, cost-to-complete, and draw approvals. Proper change orders include a description of the work, cost impact, schedule adjustment, and signatures from owner and contractor; lenders often require prior approval if the change affects the loan amount, lien exposure, or the project’s ability to meet milestones tied to financing conditions.

When a change is necessary, the borrower should route a formal change order through contract administration and notify the lender if the modification impacts budget, completion timeline, or funding needs. Provide cost breakdowns, subcontractor pricing, and proposed funding sources to the lender for review. Lenders will evaluate whether the change should be covered by contingency, require additional borrower equity, or trigger a completion escrow adjustment. Clear documentation and timely approvals prevent payment disputes and preserve draw eligibility under the loan agreement.

Change orders are the primary mechanism that generates deviations from the original budget and schedule, so they directly influence project risk and lender exposure. Uncontrolled or poorly documented change orders can inflate costs, cause delays, invite liens, and erode contingency reserves, increasing the likelihood of funding shortfalls or covenant defaults. Conversely, disciplined change-order management maintains budget integrity and transparency, enabling lenders and sponsors to respond proactively with financing solutions and minimizing disruptions to construction progress and eventual stabilization.