The Change Order Challenge
But now, here you are, hunched over your final job-cost report and something's wrong. The profit line item on the report seems much smaller than you thought it would be. You suspect (and hope for) clerical error, and timidly begin examining the report in more minute detail. Sure enough, the rows and numbers add up.
Accepting your fate, you force your mind to reflect back on the job, straining to recall any singular or remarkable examples of waste or miscarriage that would explain this profit shortfall.
No immediate, ready answers spring to mind, but there is something, however, that's starkly clear: the job’s over. It's been more than a month and there's no going back to ask for more money now!
You didn't even know the job was a loser until five minutes ago! How could you have? Final billings were still arriving from vendors and subs up until the day before yesterday. And now it's too late. Now, all you can do is clean up the mess and search for solutions.
DiscoveryYou eventually piece together what went wrong. Those seemingly minor (remember?) changes and alterations to your work during the course of the project weren't quite as minor as you had been led to believe.
In fact, when added up, they turned out to be quite costly. A little labor here, some additional material there, then there was that trim detail that was changed on the fly, and so on. You grit your teeth and do the math. You figure you coughed-up almost $4,200 in extras.
Your original profit line item was only $10,000, but, coupled with other overages suffered in general conditions, you end up unceremoniously saddled with a mere half of your original profit estimate.
Basically, you're stuck. Once again you’ve been burnt, and once again you vow that "from here on out, everything's gonna' be in writing! We'll stop the damn job if we have to!"
So, how do you get a handle on out-of-control changes in the field?
The Change OrderIn today's construction world, it is truly rare that any building project is completed without extras.
Extras are changes that happen after the original base contracts for construction are let. Though they could offer the owner a credit (through, perhaps, an item of work that was deleted), for the most part, these extras almost always involve additional charges to the owner.
Items such as the unanticipated upgrade of electrical service, alteration or rerouting of site utilities, or unforseen subterranean encumbrances (i.e. an old building that was buried on site that no one knew about) are common fodder for these types of extras.
These extras, if agreed to and accepted by the owner and architect, eventually become modifications to the base contract or (more generically known as) change orders. A change order is simply written evidence that an owner has requested the contractor to perform additional labor and/or provide additional materials for improvements which weren't delineated in the original plans and specifications.
Causes for such changes include:
- The owner or architect having a change of heart over a detail after the project has begun.
- The owner not understanding the architect's original intent/detail as set forth in the original plans/specs.
- Alteration due to code, covenant, ordinance or other governing body interpretation.
- Actual errors on the architectural plans/specifications and/or poorly defined details.
- Unanticipated, unforeseen or unknown (often subterranean) site circumstances.
Of course, there may be other reasons for legitimate changes. The key ingredient is that the change in question was unanticipated by all of the parties. A contractor who simply "blows his bid" by missing something in the plans and specifications that was clearly defined as being in his scope of work generally does not have justification to ask for additional compensation.
Get It In WritingBut, let's assume it's not your fault. As much as you want to get along with everyone — owners and design professionals alike — situations like those listed above are normally not your fault.
Generally (unless there's very strict language in the specifications or your contract to the contrary), you are well within your rights to request additional remuneration should one of these circumstances arise. And for some people, this simple exercise of asking for additional compensation comes quite hard. There's a natural tendency for these sorts of people to refrain from rocking the boat.
But business is business. And like it or not, we're all in a field that is growing more global and homogenized (and therefore intrinsically colder in spirit) everyday. The small-town relationships of old are fading from view and the sentimental vision of two business people simply trusting one another is unfortunately and sadly growing endangered.
But perhaps we shouldn't be surprised. All sides — the contractor, architect and owner — take a business risk when they enter into a construction project, and all become equally susceptible to potentially large losses should changes spiral out of control.
And so, the change order becomes important. The change order is transformed into a clinical, executable and isolated business negotiation that demands the same level of importance and attention to detail as the original base contract.
Also, in our litigation-conscious world, the change order becomes a document that may have potential legal ramifications should the parties disagree later on down the road.
We don't work in Wonderland. Projects vary, and so do the personalities of owners and architects. Some jobs genuinely include a true spirit of cooperation and partnering that make the change order process relatively fair and smooth. But some projects don't. It can sometimes be quite difficult (if not impossible) to get anyone to sign anything, let alone a change order.
New DisciplineBut the effort must be made and, like any skill that's worth learning, it takes a committed, focused and disciplined effort to master the change order process. You basically need three elements:
1. The courage and conviction to demand compensation when legitimate changes arise;
2. The ability to price, negotiate and execute these changes quickly and efficiently; and
3. The ability to enact changes with as little disruption as possible to the project schedule.
Your people in the field need to follow this new discipline, too. Part of mastering the change order skill is the proper instruction and motivation of your job foremen and managers.
Simply scheduling one meeting and demanding the field people obey your words won't do it. A sound program will invariably include periodic, repeated and consistent reinforcement by you and those doing your administration work.
Here are some other thoughts to keep in mind when creating your change order program:
- Pricing the changes punctually and getting those prices to the decision-makers is vital. Most changes are relatively small in scope and should be costed the very same day if possible.
- Without quelling enthusiasm, try to make your workers cognizant of not creating changes themselves, often through what they perceive as "a better way to build it."
- All decision-makers in the office and the field should be aware that changes must always require full and proper documentation of some kind. The decision on whether to go with a priced or unpriced version will depend solely on the situation and individual.
- Make sure all your field people (who apply) have the necessary forms and documents at their ready disposal when changes occur. It would be a shame to loose profit simply because the paper wasn't available.
- Sometimes, especially when there simply isn't time to price the changes as fast as they're occurring, try to structure the changes around a time and material, or hourly, fee. Then be forthright and fair when it comes time to bill. This sort of honesty and fair play can often win repeat customers.
- Create a program that involves as little as possible your field workers' time. You want your project managers and superintendents performing the actual work of construction, not pricing and negotiating change orders.
- Back at the office, you need to track change orders individually by job, classifying each with some sort of cost code and type (whatever works with your accounting system), and break out your actual costs into (generally) labor, material, subcontract and equipment. Do it as they come in. Don't wait until the job is completed or it may snowball on you.
A complete change order program, like any program that stands a sincere and genuine chance of becoming successful, is something obtained only through a dedicated, attentive and involved effort on the part of everyone in an organization.
The ability to ask for more money does not come easy to a lot of people, but it is a necessary skill that is vital in maintaining your company’s financial health. By implementing some or all of the items in this piece, you'll be well on your way to launching your own profitable change-order program.