As we wrap up the year, one topic keeps coming up in conversations with lenders and borrowers: change orders. If you’re in construction lending, you already know these aren’t just paperwork – they’re signals of cost volatility, risk exposure, and sometimes trouble ahead.
We recently reviewed about 400 active projects in our portfolio that are over 75% complete. Here’s what we found:
- Average change orders total about 5.59% of original hard costs.
- Historically, banks required a 5% contingency for hard costs. That used to work – back when material and labor costs were more predictable.
- Today, with ongoing price swings and labor shortages, we recommend 7.5% to 10% contingency. It’s not overkill; it’s reality.
Why the increase? Because change orders aren’t slowing down. And here’s the kicker: the numbers we see are only the change orders that have hit the payment applications. Many pending changes are still in negotiation between subs, GCs, and owners. These “lurking” change orders can blindside lenders if they’re not on your radar.
What can you do?
Always request a Pending Change Order Log with every payment request. These logs give you visibility into what’s coming, not just what’s already billed. This simple step helps lenders and borrowers avoid surprises and keep projects on track.
In today’s market, a 5% contingency is yesterday’s news. If you want to protect your loan and your borrower, plan for 7.5% to 10% and keep a close eye on pending change orders.
Finishing Strong
At USA Construction Consultants, we believe the end of the year is the perfect time for lenders to step back, review their portfolio, and make sure each project is finishing strong.
Whether through draw inspection reports, Construction Completion Commitments, or ongoing monitoring, our consultants help lenders identify potential risks early – and close out projects with confidence.
Visit the USA Construction Risk Solutions Blog for more insights on construction management and risk mitigation.
