Diluted or Deluded? Either Way, It's Costing You Money!
So there I was, just minding my own business, trying to get a project built, on time and on budget — or as my clients like to expect: "cheaper, better, faster!" Anyway, as I have come so often to anticipate, the plans weren't complete and they lacked detail. No problem, because we all know what to do in such an instance: we send a "Winning RFI." (Note: If you don't know what a Winning RFI is, go immediately to www.fullcontactPM.com, and get some help there! See the end of the article for details.)
In this instance, three RFIs were sent; the owner agreed with me that the work in question was outside of our scope. Since he was in a hurry, he didn't want me to get a quote — just do the work T&M (time and materials). On that basis, we proceeded to complete the job.
This is an important lesson for you to learn today, and it's a lesson about dealing with certain clients, such as local governments, who contract for public works construction. But first, I have to give a disclaimer:
It's great to work for most pubic agencies and construction managers (CMs). They can be very fair, particularly when a CM has the mindset that he or she is a "builder" — they are project-oriented and want to see the task get built. It's great to work with people like that. Unfortunately, some of these people are career-oriented, and will put their resumes ahead of the project. There are not a lot of CMs who are like this, but there are enough that you just have to be aware.
In our lesson today, the city's CM was a "resume-builder" sort — fairly analytical, very shortsighted and a little difficult to work with. You know the type. In our contract, and in some of the contracts that you may use, there is a mark-up percentage for overhead and profit, typically 15 percent. Sometimes, as in this case, there is a sliding scale, such as 15 percent on the first $10,000, 10 percent on the second $10,000, and 5 percent for change orders exceeding $20,000.
In our situation, with the three RFIs, we had one priced out at $3,400, one at $9,800 and the third at $7,300, for a total of $20,500. The city's CM informed us that we were to combine all three issues into one change order request because they wanted to issue only one change order. Make sense? It does for them! But where does that leave us? Instead of making roughly $3,000 on $20,000 worth of work (15 percent), we were being asked to bill in such a way that we made only $1,000 profit (5 percent) on $20,000. This was to accommodate them, and make things easier for them. And they asked us to dilute our profits with a straight face!
By the way, just so we're clear on this, do you know where that "diluted" (i.e., lost) $2,000 in profits comes from? Where do we get that money to "give away" in these situations? Well, it comes from the one place that you never, ever want it to come from: your company's after-tax net profit. And it's always bad to take money from there!
What to do? In this case, I re-read the specs, and concluded that the CM probably had the right to ask us to do this — to dilute our profits. At least, the specs did not prohibit him from asking that be done. So we settled on a three-pronged approach:
- Because it was early on in the job, and the specs did not prohibit the CM from doing this, we decided to tell the CM, in writing, that we would allow their request this one time only. We did not agree with their take on things, and told them that, for the sake of the project, our company was agreeing to "make this donation" to the city.
- We informed the CM — in writing — that on any future work like this, we would discuss each new issue on a case-by-case basis. At the conclusion of each discussion, it would be agreed specifically that our company would do this future work only if everyone was in complete agreement — in advance and in writing — as to how our company would bill for each new issue, including markup. We also reminded them that this is exactly the procedure called for by their own specs!
- In the event that the CM found such a procedure not to be satisfactory, then the CM should find another contractor to do their out-of-scope work, because doing it any other way would conflict with the requirements of the project specifications written by the CM.
Less-than-fair markups dilute your company's profitability, and if you continue to allow them, you delude yourself. Set your standards early. Know your scope and your specs. Be firm. Be fair. Be polite. And smile big!
About the Author
Gary Micheloni is a working project manager, speaker, author, consultant and coach. He has severals years of industry experience, including a background as a licensed general engineering contractor. For further information and insight on the Full Contact Project Management approach, write Coach Gary at FullContactTeam@gmail.com.
Copyright © 2007, Gary Micheloni and Full Contact Project Management