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Construction companies leave money on the table when they don’t collect for materials, labor and other change order costs. One contractor outlines his successful process.
March 10, 2023
Change orders are common in construction projects, but many contractors don’t charge clients for all changes or their related costs. Timothy Faller, a Maryland remodeler turned consultant, said during an educational session at the International Builders’ Show recently there are seven big mistakes construction companies make regarding change orders and provided solutions for how to get paid for all of them.
1. No written documentation
There are a number of reasons why contractors don’t get change orders in writing—and thus don’t get paid for them, said Faller, who works for Remodelers Advantage, a peer-mentoring consultancy.
The contractor doesn’t want to “nickel and dime” the customer.
The lead carpenter or project manager gets distracted.
The carpenter/manager hasn’t read the contract and thinks the change order task was included in the document.
“Little things” don’t get caught by the field team and then don’t get charged to the client.
Faller said it doesn’t matter how small the task: “Write up every change.”
2. Too long to process
The clients will think a change was “free” if you provide them a change order bill two to three weeks after the change was completed, or in the final invoice, Faller told a packed room.
“Really push to get the change order done as quickly as possible,” he said.
One way to do this is to have field staff write some of the change orders. Create a standard fill-in-the-blanks form anyone on site can use, he said.
An easy-to-use change order form should include the:
Description of the new work.
Price of the new work.
Revised final cost of project.
Added time to the schedule.
Revised completion date.
Signature and date lines.
Besides providing the form, educate staff as to why written charge orders are important to your company and that they need collect them from the client. Likewise, set a policy so that change order forms are quickly filled out.
There might be unforeseen problems during the project that the lead carpenter or project manager discovers, but when does the client see the documentation?
“If you don’t have some kind of policy and enforce it, the lead carpenter keeps working until the end of the day,” Faller said. “Then the change order sits there (on the estimator’s desk) because he’s got eight jobs to write up.”
So, assign this task to someone other than the carpenter or project manager who has more time to get the change order moved along quickly.
3. Inaccurate pricing
Often construction companies forget to include prices for all the things related to the change, including additional dump fees and the supervisor’s time talking to the client about the new scope of work.
Also, not all material costs are accounted for. For example, you may have to buy a bigger piece of trim for the 2 feet that’s needed. “The client has to pay for the bigger board,” he said.
Plus, charge a fee for the person who has to make a lumberyard run—and it shouldn’t be the project manager.
But before you do anything, ask the clients if they want to go ahead and make the change based on the change order price. If they say no—that’s too much—stop work right away.
Another thing to consider is change order work always takes more time than expected, so if you think the extra work is going to take two hours, add four hours to the price.
Some companies charge a fee for every change order because of the time spent creating it—even if the client ultimately says no.
“It’s a great idea if you are comfortable with it, but if I’m not, I’m always going to find a way to put the cost on the client,” he said.
4. Time and material assumptions
Say you are working with a time-and-materials contract so the client needs to understand that any additional work will cost extra, but clients don’t always remember what’s in the contract. So, when a change arises, say “I’m sure you remember you are going to pay for that,” Faller said.
In addition, keep a daily log of all the time and material changes.
For time and material changes, remember to:
State in contract the hourly cost for labor and markup on materials.
Write a change order for every change.
State on the change order form the cost of labor and markup.
Add up the “ceiling” costs in the change order.
Get the client’s signature.
5. Allowance and markup losses
An allowance is a number you assign to a task or materials to move forward with the contract. But the client assumes you can do the task for that exact amount, or you have poorly defined the task and it costs more.
“You’ve got to get your allowance when they pick it out/buy it, and you have to figure out how to get the markup on that change,” he said.
Faller recommended using an allowance markup calculator to help you make better decisions.
He also offered these tips:
Do not lowball allowances to get the job. Provide allowances that reflect what the client wants.
Detail the allowance specs to represent what is included and what is not. For example, if the client wants higher-end dark paint, note that dark paint costs more than what’s in the allowance.
If possible, specify the actual products in the allowance.
Detail how you will adjust changes to the allowance versus other changes.
6. Communication errors
The field staff needs to know what’s in the contract language, so it’s important to have a preconstruction meeting. During that time, let the project manager/lead carpenter talk about potential changes and how they will be handled.
Faller said field staff should not say to the client, “sure that can be done,” but “sure it can be done but it will cost additional money and will add some time to the project.”
Ask the clients if they have a budget in mind for the change and tell them how long it will take for you to get back to them with the price.
Also, when the field team comes across unforeseen conditions, such as termite damage or rot, contact the client quickly by phone, text or email. “Do not proceed without written permission…. Get their permission to spend their money.”
Present the change order cost to the client by:
Scheduling a time to meet.
Being confident in your number.
Being ready for many different responses from the client.
Not taking on the client’s pain.
Never reducing your prices in the presence of the client.
Dealing with objections by finding out what the clients are really concerned about.
Remaining confident of your number throughout the conversation.
“If you give a little now it will cost you more later,” he added.
7. Disturbance days
The project’s overhead, labor and other costs also have to be accounted for in the change order. “A change order that takes two days to complete with labor may delay a project four days,” Faller said.
“Disturbance days” may delay your trade contractors too. “Get something for these days you are losing because the change also changes the number of days of work you can do in a year,” he added.
For more tips and guidance from Faller, check out his podcast at TheTimFallerShow.com.
Editorial Director, ConstructioNext, WOC360, IRE360, Informa Markets
Jean Dimeo is an award-winning editor, writer and publication manager who has worked in construction publishing for 30 years. Dimeo was managing editor of Construction Dive, our sister publication about commercial construction, and the editor in chief of Builder, EcoHome and Building Products, all about residential building and remodeling. She also worked as an editor for a Spanish-language construction publication and as a building products expert for consumer magazines including Better Homes & Gardens SIPs.
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