Get Paid Up Front for Change Orders

One of the industry’s favorite business instructors is Leslie Shiner, and she has published a gem of a book calledA Simple Guide to Turning a Profit as a Contractor. The book is written like a conversation between a consultant (Hope) and several players. Here, Hope discusses change orders with Mike the contractor.

Change Orders Add Money AND Time

... Hope spent some time looking at [Mike’s change-order] form.

“I see you have some good information here, Mike. You have a place for a description of the change, what it will cost the customer to make the change, the adjusted contract price -- good job including that -- and you require signatures from both the company and the customer.

“What I don’t see here is the impact of the change order on the schedule, or the terms of payment. Maybe the terms are missing because you don’t really have a policy about changer order payments. Do you?”

Mike looked uncomfortable. “I think that like many other aspects of the business, in the past we’ve sort of done whatever seemed logical -- or convenient, or comfortable -- at the moment. What do you suggest?”

When Should Change Orders be Paid For?

“Typically, I suggest that you get paid for change orders when they’re signed.

“There are several reasons for this. First of all, it brings home to your customer the fact that changing their minds will, in most cases, cost them money. Making changes has consequences in terms of dollars, and often in terms of time. You don’t necessarily want to discourage customers from making changes, especially if you’re making a tidy margin on change orders, but they must feel the consequences.

“Also, even if you see change orders as a welcome addition to your profit, remember that changes that impact your schedule will mean a lot of work for your staff. It’s the old domino effect. If the current job ends late, will your next job have to start late? If so, will your subs be able to accommodate the new schedule? And how much time will your staff have to spend informing subs and suppliers and re-scheduling deliveries or work?

“The impact of an altered schedule can be significant, and it’s something that your customer can’t be expected to understand. This is why I also suggest that you may want to put a higher markup on change order work to compensate for the additional effort and headaches that they often produce.

“Another consideration is that if you delay getting change orders paid for, you may risk having them build up, only to create a nasty surprise for your customer. I had a client who allowed $50,000 in change order to accumulate throughout the job, and he hit the customer with them all at once at the end of the job. He was very, very lucky in that the customer paid them, but it left a bad taste at the end of the job when you really want the customer to be happy with you.” …

What About On-the-Fly Changes?

“That makes sense,” admitted Mike. “But what about the situation where my guys are in the middle of framing something and either the homeowners ask for a change that will mean the framing will have to be done differently, or we discover an error in the plans that need to be adjusted? There may not be time to stop, do an estimate, write up the change order, and get it signed. In that situation, isn’t it better to just do the change and keep going so my guys aren’t sitting around waiting for the paperwork?”

“I agree that’s a tough one,” admitted Hope, “and my suggestion would be to have some three-part carbonless forms made up just for this purpose and keep some right at the job site. If you progress to using a lead carpenter system, this is precisely the kind of thing that would be handled by your lead. He would write up a description of the change and price it if possible.

“If estimating the cost was impractical, he would put ‘to be determined’ in the blanks for cost and schedule payments, and at least get the darned thing signed. Then, he would keep one copy, give a copy to the customer, and send the third copy back to the office with his timecard. Now, at the very least, this indicates an agreement between the company and the customer that the work to be performed has been approved.

“You should also be sure that you get back to the customer within 24-48 hours. You can then provide a revised change order with the pricing and schedule information on it, accompanied by an invoice for any additional charges.

“However, since nobody in your existing crew has had sufficient training to perform this kind of task, I think it’ll need to be up to Frankie to write up all the change orders for now. In the situation where the costs are unknown, Frankie will just have to put ‘to be determined’ for the cost and the time delay, but still get a signature from the customer. If Frankie can’t get to the job site, you may -- for the time being -- provide some blank forms for the field crew. However, the rule must be they will not be permitted to include any price quote.”
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A Simple Guide to Turning a Profit as a Contractor, by Leslie Shiner and Melanie Hodgdon, is available from EH Publishing for $28.95. Order it here. (CE Pro VIPs save 20%)

http://bit.ly/shinerbook

Enjoy more excerpts from the book here.