Engineering Project Cost Estimation and Change Orders

TRUE STORY - AI vs. Cost Overruns: The $700M construction mistake (and my roadmap on how AI could have saved it) Last week I talked with the CFO of a major construction firm in Saudi Arabia. Their flagship project? A $700M mega-development. Their nightmare? Cost overruns wiped out $60M of margin and NO ONE caught it in time. Sound familiar? When he called me, he wasn’t looking for theory. He had already hired the best project managers. The best schedulers. The best finance team. And still - The project was bleeding millions. Slowly. Quietly. Almost invisibly. By the time their internal systems caught the overspending, it was too late to fix it without serious damage. His story wasn’t unusual: - Vendor payment lags were hidden for months. - Early warnings from site engineers never reached finance. - Change orders piled up without integrated cost impact analysis. - Forecasts were still based on monthly data , not daily realities. I asked him one question: "If you could see a $5M cost bleed within 7 days, not 90, how would that change your decisions?" He went silent. That ONE shift could have saved them $45M+, without headcount. Here’s what my AI-driven roadmap system would have done differently: Phase 1️⃣ : Immediate Visibility (First 30 Days) - Deploy Procore Financials on all project sites. Catch cost overruns 45–60 days earlier. - Integrate Snowflake as the live data warehouse. Pull real-time cost feeds from 15+ sites. - Set 3% deviation alerts. Flag $50K–$100K leaks as soon as they happen. - Run weekly cash flow models with CashAnalytics. Predict cash squeezes 8–12 weeks ahead. Expected impact: Recover $10M–$15M by Month 1. Phase 2️⃣ : Risk Prediction and Early Action (Next 60 Days) - Train nPlan AI models on project schedules. Simulate 1,000+ scenarios for early warnings. - Predict change order risks from weather, labor, and supply chains. Flag $5M–$10M margin threats before they explode. - Auto-feed risk alerts into Anaplan forecasts. Refresh margin predictions every 48 hours. Expected impact: Prevent 60% of change order-driven cost overruns. Phase 3️⃣ : Contract and Vendor Risk Defense (By Day 90) - Deploy Evisort to scan 100+ active contracts. Flag LD penalties worth up to $20M. - Monitor 200+ vendors monthly with Prewave AI. Spot supplier risks 90 days before they break. - Prioritize contingency planning. Protect critical paths before damage compounds. Expected impact: Protect $15M–$20M in project margins. The real enemy wasn’t ONE mistake It was death by a thousand cuts. Each small delay, small overspend, small warning - ignored because no system could surface them fast enough. If you’re a CFO running complex projects today, ask yourself: - How many days would it take you to catch a $5M leak? - How much margin are you bleeding that you can’t see yet? Enjoy this? Comment your thoughts below, repost it to your network, and follow @LylyaTsai!

This is an uncomfortable conversation to have in the construction industry so don't shoot the messenger. Don't forget to discuss extending the schedule for changes on a project. When you bid a project, you are allocating X number of people for Y number of hours per week, for Z number of weeks. When a change order comes, there are three options. 👉 Extend Schedule for Standard Time Rates If the Schedule extends, the contractor and subcontractors should be compensated for extended general conditions ie. vehicles, rentals, overhead operating costs, project management and superintendent time, etc. No, it isn't included to rent an excavator for 10 months in a 5 month project. Before agreeing to a subcontract, find out what's allowed and not allowed for costs in a change order. Best Practice is to have the contractor create an Exhibit in the Contract specifically stating items and titles allowed, cost if known, and what's not allowed. For example, many companies use a Project Superintendent for a specific job and a General Superintendent working 3-10 jobs helping Project Supers. Are capturing the General Supers cost permissible? *If a company likes working with you because your team is on top of issues, it is most likely because you have a structure like this and they should be okay with you charging that fee.* Why should those be on the table, shouldn't it be included in the overhead cost of the entire project? No, those costs were not requested or thrown in at the bid stage so it's only fair to the Contractors to pay for those. The industry standard is 10% OH 5% profit for those that aren't job specific costs like superintendent, project management, vehicles, rentals, etc. 👉 Overtime Why should overtime be included if the work is still getting done during the same schedule timeframe? Because companies plan manpower based around projects. For example, if a project required 10 people for 20 weeks and now to complete the job in the same time with 2000 extra hours, an additional 2.5 people would on average need to be on site the entire 20 weeks of the project. But they just added men doing straight time so why should we pay overtime? The company performing the work had to pull manpower from another project to do the additional work on your project. That other job now has to do overtime and that additional cost burden shouldn't be expected to be absorbed due to your project scope increasing. 👉 Don't do the work. If the cost of doing the additional work creates a loss due to pulling resources, overtime, etc. do not negotiate the change order cost. Your company is entitled to be fairly compensated for doing the additional work and the owner is entitled to have ANYONE do the change order work after the project is completed. What other hot takes would you add? PS. This is a post worth savings to reference for your next change order.

Why do so many contractors lose money on change orders? I speak to many auditors who say change orders are the #1 reason why contractors lose their shirts on projects.   It’s simple.....They either avoid the paperwork, avoid the unfortunate tough conversations that may be required with the owner/GC, or just don't know how to identify them.   Here’s a quick story... I had a client who would identify a change order that was clearly beyond the original contract, BUT time and time again, the GC would say something like, “The owner will never pay for this, just get it done.” AND they did it..... UNTIL I came on board.   Let me be clear.....That’s absolutely insane!!!!   The GC wasn’t willing to stand up to the owner or follow proper processes, and instead, they dumped the risk on my client. I told him he needed to consider to stop working with this GC.   You must understand...If it’s above and beyond the original contract, it needs to be treated like a new contract. No signature, no work. Period!!! Yea I know contract says you can't stop working....you have ways to navigate this.   Let’s break it down a little more   1. Handle Change Orders Immediately and stop putting them off. Develop and submit the paperwork before or as soon as the work is happening or shortly after. NOT weeks later when it’s an afterthought. Change orders are either Time and Material (T&M) that needs to be done now or pre-estimated and agreed on for future work. T&M sheets MUST be done daily AND signed off daily by an owner rep AND submitted for payment immediately after completion of work NOT months later. Pre-estimated change orders must be signed off and approved before you order materials and start work.   2. Get Everything in Writing - A change order is no different from your original contract. It’s not official until it’s documented and signed. If a GC won’t sign a time-and-material sheet or change order, refuse to do the work. You must train the owner to treat you fairly not like a degenerate.   3. Document, Document, Document - Keep a paper trail, photos, emails, updated scopes, daily logs. This protects you when there’s a dispute.   4. Don’t Avoid Uncomfortable Conversations - Yes, it’s awkward to demand signatures or talk about extra costs, but those conversations now save you major headaches (and money) later.   Too many contractors lose out because they delay, avoid the process, or hope for the best. Don’t let that be you. Be proactive, get signatures, and protect your profit.   What's been your experience with change orders??? Let’s talk about how to avoid these situations. #proaccel #constructionchangeorder #constructionconsulting #constructionoperations

This is how I think of change order negotiations and why "winning" a CO negotiation doesn't mean what many people think it means. After years of managing complex projects, I've seen how the traditional approach hurts everyone involved. The old playbook: Delay approving change orders until they pile up, then force the GC into a "settlement" for less than the total. Project owners feel like they won, contractors feel cheated, and relationships deteriorate. Here's what I usually discover when I actually get into the change order details: Between discrepancies, double counting, and items that weren't even valid changes, many owners are often being overbilled by MORE than what they had "settled" for. The irony? That stressful "settlement" tactic didn't actually save money, didn't follow the contract, and destroyed trust. There's a much better approach that starts with understanding the two core components of every change order: First question: Is this actually a change order? This requires determining if the work was included in the initial contract and if the claim was submitted within the contractually required timeframe. Pro tip: Always establish clear change order notification deadlines in your contracts. This protects both owners and contractors from surprises months after work is completed. When a contractor submits something that isn't a true change order, don't get confrontational. I start by asking questions: Did the GC buy the scope but the sub "forgot"? Was it allocated to a different trade? Did the GC simply miss it entirely? Second question: Is the cost accurate? Many hide behind "good clients don't nickel and dime" - but reviewing cost breakdowns isn't bargaining, it's basic project management. And you're spending investor money! Common cost errors I've found: - Materials charged to wrong projects - Double-counting materials (like two layers of drywall) - Incorrect material takeoffs - Wrong labor rates - Estimated vs. actual labor - Unnecessary trades added - Incorrect markup percentages In most instances, these are honest mistakes, and good contractors are eager to correct them. Having said that, understanding the contract doesn't mean you can't be reasonable. I've often: - Split contingency costs - Paid for GCs beyond requirements - Extended schedules with capped GCs - Approved lump sums instead of T&M The goal isn't rigid contract enforcement - it's completing quality work through good-faith partnerships. But showing attention to detail from day one prevents anyone from taking advantage of an inexperienced owner. Remember: Knowing your contractual rights and negotiating fair solutions aren't mutually exclusive. They work together to create projects where everyone succeeds. The best teams trust each other AND verify the details.