$20M Project: Dealing with Change Orders

Mark, I feel your pain! Even change orders on small jobs can be tough to deal with as those clients are very dollar concious.
I recall one job you and I worked on years ago (the 36,000 sq ft place in Medina)... It was a real battle to get the final payment(s) taken care of due to changes and cost overruns.

Bruce,  When we train dealers we always tell them all changes orders are paid in full, in advance.  Otherwise they become a bartering chip at the end of the project.  Create a system and never go off the path, every time we did we got burned.
Being a nice guy in business is not telling your client his kids are ugly, being a professional is getting paid for all your time.

The best solution to Change Orders that I’ve found is to not let the job or the costs get ahead of you.  Give your techs a comprehensive list of what’s included on the project so that a change can be clearly identified.  If it’s a small change such as adding a jack then this generally can be written down on the “Change Order Form” signed by the GC and work continues.  On the larger changes it is necessary for the change to be turned into engineering BEFORE THE WORK IS PROVIDED, priced out and given to the Salesperson to present to the client.  Here’s how you keep out of trouble; the customer needs to pay for the Change Order in FULL at the time of acceptance then you do the work.  Otherwise you can look forward to discounting your work at the end of the job when the customer is already over-budget, past the original time line and all around grumpy.
One last suggestion to arm your field tech’s with blank Change Orders that have 3 carbon-less copies.  Prepare them with a Process for the inevitable changes and just like the rest of the construction industry you’ll find that Change Orders can contribute to the job’s profitability.

Mark:  I must use your “nice guy” quote above.  Hope you don’t mind,

Ivy Slotnick, Wired Island

In reference to the job I mentioned that you and I worked on I meant to point out the change orders for the company I was with - not yours - in terms of collecting the final payments for changes…!!!

More thoughts on creating a Change Order Process;
- Charge an Administration fee to process the Change Order if $100.  This will help you recover your costs above the material and labor to install.
-  Track all your costs and compare them to the contract.  This will help insure that you have the information you need to bill even if you missed writing up the Change Order.

Bruce, I knew what you meant, I just took it as an opportunity to touch on change orders.

Ivy, that is a Mark original, but knock your self out, it made Susan laugh too.

Susan, trust me, I like to charge for everything and anything that I can, but when see your post about charging a change fee all I can picture are those Southwest Airlines adds about how change fees are the most evil thing on the planet!  I would suggest burying that change fee somewhere in general installation and not showing it as a line items.

Hi Rob, hide or show the charge just make sure its in there.  I can’t say that this was an original idea; when I contracted to have my pool built I was told during the Sales process that after I signed the engineering docs, change orders would be the cost of materials, labor plus a $100 Admin Fee.  My jaw literally dropped and then I thought, why am I not doing this.  That’s another important note that whatever your Change Order policy is, be sure to include them in the Client Contract and have the Salesperson verbally discuss it.  I’ve found that clearly defining your Change Order policy both captures earned revenues and can save a client relationship.

As mentioned above…

Present change order invoices immediately. It makes everyone aware that you will be charging for change orders.

This will either help tremendously with the decision making process (no more changes) or it will significantly add to your project profitability with a client who doesn’t mind paying to get exactly what they want on their terms.

While on the subject of getting paid before the end of the job when clients and their budgets are exhausted… Break your projects up into clear/specific stages. Complete a stage, submit an invoice, get paid, complete a stage, submit an invoice, get paid… so on and so forth.

Last one… Don’t bankroll the hardware. Sell the wire or speakers or keypads etc and then deliver/install them. Dont deliver/install them and then submit an invoice.

The only thing you should ever have to gamble with is labor (performing the task before getting paid). It becomes less of a gamble when you do good work and efficiently complete, clearly defined stages of the project.

Stamp, you are wise beyond your years or at least the company you work for has made the mistakes and knows better.  A rule of thumb I always use is to have more of their money than they have of yours, up until the end.  Then have a small retention that you can walk away from if the client proves difficult.
So often at the end, a client can try to have you do more than is in the contract by leveraging the final payment.  After they realize it won’t work they back down.

Programming & Product Configuration are the last phase and the only money left on the table at the end of the job. Everything else is completed and paid for before this phase begins. This helps iron out last minute changes and makes sure you are DONE and deserve to be paid. It doesn’t just make sure your being paid it also helps keep dealers honest.

Some control systems allow you to code in trialware so the system stops functioning after a given period of time. Other control systems have secure source code vs “extractable code” so that you can leverage the editable version of the code. While these tools are helpful in securing final payment i think the best way to make sure you get paid is to do a good job and meet your deadline.

Most of the lessons were learned the hard way. Company has been around long enough that we were able to learn these lessons without going out of business thanks to hardware margin. The good old days when you could lose your shirt on labor and change orders and give away design for free and still walk away with a $1 in your pocket. I cant imagine what its like to learn these lessons in our current economy.

What makes you say Stamp is wise beyond his years? He’s 73 years old.

Julie, your just jealous, Stamp has a good understanding of business and and drives a very cool car (we are all a little jealous of his car).

Most don’t make the cut today, there isn’t a safety net of profit or recurring revenue to carry a business through the learning curve.  I work in other channels and they figured out how to generate new work and a steady cash flow, ours is still working on it.  We aren’t invaluable yet and we better hurry before it doesn’t matter.

Looking back at the days of $25,000 50” flat panels and selling 2 channel systems off the floor, heady times, long since gone.

Hi Stamp; you’re sure holding up well, given your age.  I think we all age slightly ahead of our time in this industry.

You bring up some good points about the terms of payment.  In this industry what you don’t define your customer will.

I grew up believing that if I worked hard and did a good job that I will be rewarded.  This industry has taught me that I better have a good client contract with terms that don’t put me in a position of bank rolling the job. 

We’re talking leverage and at the end of the job what do you have as leverage?  I’ve found that there are several actions we can take;
Substantial Completion:
this is where you walk the client through the project providing evidence that everything is there and that it is operational.
Amount due:
no more than 10% preferably 5% on larger jobs.
Scope of Work:
a simple definition of what your programming along with an agreed screen layout will save you hours chasing your customer’s satisfaction.
Build in a follow-up training:
Understand your customer’s position they think that if they pay you, you’re gone and while we actually already had those thoughts, the majority of us will stay on a job until they’re happy.  So why not get paid for the inevitable follow-up.  Build in 2 hours to come back out after 30 days and again, set the expectation during the Sales process. 

The customer is happy and you get paid timely.