Because commercial construction projects are incredibly complex, change orders happen pretty regularly. This can be due to fluctuating material costs, unavailable materials, weather conditions delaying work, or clients requesting changes.
There are different types of change orders.
Standard change orders, also called additive change orders, extend the project timeline or add to the project scope of work, which often means an increase in project costs. These can include everything from additional square footage to upgraded finishes or equipment.
But sometimes contractors need to issue a deductive change order. A deductive change order is used when substitutions must be made or portions of the scope are eliminated, lowering the total construction contract price. Sometimes these changes are driven by budget constraints, updated designs, site conditions, or client priorities shifting mid-project. These reductions require careful management to maintain project profitability and harmonious working relationships. Read on for examples of deductive construction change orders, the process for implementing a change order, and how ServiceTitan Construction Management software empowers contractors to protect profit margins and deliver projects on time with robust project management, change order management, and job costing tools.
When Are Deductive Change Orders Used?
Deductive change orders are used any time a change is made that results in a lower contract sum. Examples include:
Substitutions: Whether a product or material is delayed, unavailable, or spikes in price, a substitution can result in a deductive change order. For example, if all the faucets in a building are substituted to a faucet with a lower unit price due to a product backorder, a deductive change order would be used.
Project owner changed their mind: Sometimes clients approve a scope, then change their mind. They may ask for design changes that drive cost reductions. A revised layout might consolidate rooms and reduce the number of outlets or light switches required. Or, if the HVAC layout is simplified to eliminate duct runs to a removed mezzanine, the associated labor and materials would be deducted from the original contract.
Budget cuts: If the overall project budget is reduced midstream, owners may request a scope reduction. For example, they might downgrade electrical fixtures throughout the building or install fewer plumbing fixtures in public restrooms. Each of these changes would be reflected through a deductive change order.
Construction document errors: Sometimes the general contractor will notice mistakes or ambiguities in the construction documents and drawings and submit a request for information (RFI). The response to an RFI may clarify that certain elements are unnecessary or overdesigned, leading to scope reductions and a deductive change order. For example, an RFI might confirm that a structural beam is no longer required due to updated load calculations.
Code or permit changes: Occasionally, local building codes or inspector feedback results in the removal of previously planned systems or components. For example, if electrical panels are consolidated to meet a new code interpretation, fewer materials and labor may be needed, prompting a cost reduction through a deductive change order.
How Deductive Change Orders Affect Project Costs and Timelines
Deductive change orders cause budget and schedule challenges.
Budget
Deductive change orders reduce the contract value, which can affect a contractor’s anticipated profit margin. While material and labor costs decrease, overhead and fixed costs often remain the same—squeezing margins if not managed carefully. For subcontractors working on tight bids, even small reductions can impact overall profitability, especially if the change occurs late in the project when much of the planning and procurement is already complete.
To combat this, construction companies should use an end-to-end project management system that provides real-time financial insights, enabling them to protect margins by optimizing labor forecasting, resource allocation, and scheduling when change order deductions occur.
Schedule
Removing or modifying scope can throw off established schedules and sequencing, changing the completion date. For example, eliminating a set of HVAC runs or electrical circuits may delay follow-on trades or require coordination with other teams. If a plumbing fixture is pulled after rough-in, it may lead to rework or idle time for the crew. While the change reduces work, it can also introduce inefficiencies that offset some of the savings.
ServiceTitan provides visibility into every construction phase, helping to keep projects on track. Users can create a dynamic plan that auto-updates progress and costs as work gets completed. With crew management tools, you can track and adjust schedules as needed.
The Process for Implementing a Deductive Change Order
Any time you make changes to a contract, a process must be followed. The change order process includes:
Initiation: The process begins when the client or contractor identifies the need to reduce the scope. The client and construction or project manager will discuss the proposed changes and make a plan.
Negotiation and documentation: The contractor then prepares a written change order form outlining the cost and scope reduction, with backup documentation. All parties must agree to the proposal, which sometimes requires negotiation to align on a fair value and timing.
Approval process and contract update: Once agreed upon, the deductive change order is formally approved and integrated into the contract documents. The project schedule, budget, and scope documentation are updated to reflect the amendments.
What Should a Deductive Change Order Include?
A deductive change order should include the following:
Description of deleted work or modified scope
Reference to original contract or original scope section
Itemized cost deductions
Adjustments to the project timeline (if any)
Signatures from all relevant parties (owner, general contractor, subs)
Risks and Challenges of Deductive Change Orders
Beyond affecting project schedules and budgets, deductive change orders pose the following challenges:
Inventory issues: Deductive changes may result in excess inventory, restocking fees, or custom materials that cannot be returned, creating additional costs that may not be fully recoverable.
Communication breakdowns: Changes in scope can easily lead to misalignment between the project owner, general contractor, and subcontractors. When updates aren't clearly communicated across teams, it often results in confusion, rework, or missed steps.
Legal disputes: Disagreements can arise over the value of the deducted work and whether deductive change orders (reserved for minor changes) count as a partial termination for convenience (used for major change directives), especially if the original contract language is vague. This can lead to breach of contract terms and litigation.
Relationship strain: Contentious deductive changes can damage working relationships between owners, contractors, and subcontractors, potentially affecting collaboration on current and future projects.
Incomplete documentation: Sometimes changes happen on the fly. But failing to fully document the changed work, timeline impact, and cost adjustment in a formal, signed change order can lead to problems down the road. If there's no paper trail, disputes over what was removed or what should be billed can surface long after work is completed.
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How ServiceTitan Helps Manage Change Orders
ServiceTitan Construction Management software solves many of the challenges associated with change orders. It creates one centralized location for construction documents, WIP tracking, contracts, and more, ensuring documentation is secure, accessible, and up-to-date.
In addition, it provides workflows built for change management, so all changes are tracked, approved, and signed off on. This creates an audit trail for all stakeholders.
Beyond documentation and approvals, the platform empowers construction managers to automate crew scheduling, time tracking, and daily logs. Real-time updates, including change orders, flow into your project plans, budgets, and documents, keeping teams in lock-step and projects on track.
Job costing reports show project budget versus actual tables that are continuously updated as crew members log hours, inventory is used, and materials are ordered. This allows project managers to pivot when needed to maintain profitability throughout the job lifecycle.
To avoid miscommunication, the platform's integrated communication tools ensure all stakeholders remain informed about deductive change orders in real time. This transparency ensures everyone from the office to the field is working from the same updated plans.
Change orders are inevitable in the construction industry, but how you respond makes a difference. ServiceTitan Construction Management software helps protect profit margins and keep projects on track. Schedule a demo to learn more.
