Stop Doing Change Orders for Free
If you were asked by a good friend to pour money down the drain, would you do it to make them happy and avoid conflict? No! Then why do you do it on construction projects for your customers? Contractors often try to avoid conflicts and keep their customers happy by not asking for extra money for work performed that is not included in their contract. Everyone knows additional work orders must be in writing before you start extra work if you want to get paid for it. But there are always a million excuses why formal approval for added work wasn’t obtained until after the work was performed. To make matters worse, when you proceed on extra work without prior approval, you are at the mercy of your customer, hoping they’ll grant you some portion of the money it cost you to do the work on their behalf.
Changes will occur in constructionChange orders are written, binding amendments to the original contract signed and agreed to by both parties, documenting changes in scope of work, price, time, schedule or terms. Your customer has the right to change your contract, and you have to do what you are directed to do, provided you agree to the terms. When a construction project owner or your customer decides to change, delay, add to or deduct something from the project or contract, it is a legitimate change order opportunity. And any differing, unforeseen, or missing conditions or requirements not identified in the contract documents, plans or scope of work will constitute a potential change order. Change orders must be agreed to in writing to be binding, enforceable, and to authorize extra money for contract changes.
Rules to Stop Doing Change Orders for Free
1. Train your customersTo make sure you don’t do change orders for free, request a pre-job start-up meeting with your customer to discuss the contract terms and how to proceed when potential change orders occur. Read the contract terms together and ask if they want you to follow them. Most contracts will indicate change orders must be approved in writing prior to proceeding with the work if you want to get paid. Discuss what will be included in change order requests, like labor and equipment rates, supervision, markup, etc. When they ask you to do something without putting it in writing, you can refer them to that meeting held weeks ago, and your agreement as to how change orders are to be handled.
2. He who has the gold does not ruleRead your contract or subcontract, and know what it says about doing extra work and getting it approved and paid for. You were hired to do only what’s included in your contract— no more, no less. If the plans or specifications are incomplete or incorrect, you deserve to get paid for whatever the work entails. Don’t let your customer bully you to do extra work for free, just because they think it should be included. Put your foot down at the beginning of the project and tell your customer how you work, how change orders will be handled, and if they want something done to put it in writing.
3. Charge the right priceMake sure you know what labor, equipment, supervision, overhead and markup rates are allowed by contract before you submit a change order request. The best way to avoid conflicts is to submit a standard time and material work order or extra work rate sheet at the start of your project to your customer and staple it to your contract. List all the field employees, equipment, tools, overhead and profit rates you charge. To get started on creating a change order system, email GH@HardhatPresentations.com for your copy of “Project Management Forms for Contractors.”
4. Two heads are better than oneWhen deciding the terms and price for a change order request, sit down with another of your company managers and discuss the options available and how best to get the change order request approved quickly by your customer. By talking about the issues, you will temper your temper, and then submit a proposed change order that will get approved without delay.
5. Don’t play “change order ping-pong”Settle change order requests quickly. Rather than submit an unreasonably high lump-sum price for change order requests and argue back and forth for weeks while the project gets delayed, submit detailed cost breakdowns explaining how all the costs were calculated. Then sit down as soon as possible and negotiate a quick resolution. It is better to compromise and agree quickly than to get into a drawn-out dispute with customers. Remember, when you don’t get approvals reasonably quickly and end up in court, only the lawyers win.
6. Solve field problems at the field levelWhen managers and company owners have to get involved in every little cost issue and potential change order request, it adds time, delays and hassle to projects. Design your change order approval process to allow field foreman and supervisors to resolve issues with their peers at the lowest level possible. Most foremen can get a fair decision with a customer in about five minutes, whereas it can take weeks or months to get final decisions when running issues up the ladder.
7. Don’t start extra work without a signatureSometimes you can’t determine the final price for extra work before you need to start the work. For example, hitting an underground water pipe requires an immediate fix to stop water flowing. When these instances occur, be sure to get a written notice to proceed or an interim construction change directive, authorizing you to go ahead with the additional work before you start. The directive must also include language that a final change order will be approved for the extra work based on standard rates and markup upon completion of the item.
8. Get it in writing or do it for freeMoney fades as memories fade. People can change their minds, forget the facts, change their story or leave the company. You have leverage with your customer before you do extra work, not after the work is completed. After you finish, the only thing to negotiate is price, and the only way you can win is to reduce your price. Not good leverage! Therefore, document every potential change order now. Put your detailed documentation and claims for changes, errors, omissions, time, delays, acceleration, differing conditions, or money in writing immediately — the same day you become aware of the issue. And never do extra work for free!
About the Author
George Hedley is a best-selling author, professional speaker, and business coach. He helps entrepreneurs and business owners build profitable companies. Email firstname.lastname@example.org to request a free copy of Everything Contractors Know About Making A Profit! or signup for his e-newsletter. To hire George to speak, attend his Profit-Builder Circle academy or find out how he can help your company grow, call 800-851-8553, or visit www.hardhatpresentations.com.