JOB MANAGEMENT - CHANGE ORDERS (EXTRAS)
Every job you take on should have a written contract, limiting your responsibilities and outlining the parameters of the job. However, jobs are rarely completed exactly as originally planned. All changes, extras, deviations, amendments, expansions and variations to the job as originally specified in the contract should be executed in writing by a change order, and reference should be made to the original contract as being part of the overall job.
Each change must be fully understood by both the customer and the contractor to eliminate future misunderstanding. Difficulties arise in collecting on change orders because theres a question about who ordered the change and lack of an authorized signature. To reduce collection difficulties, get in writing the name of the person who can authorize change orders, a timetable for billing, and whether you bill upon completion or at the end of the contract. If the general contractors foreman or supervisor is so authorized, they should have change order forms available at the jobsite, and submit one to the contractor before any of the changes are started.
It is poor policy to wait until the contract is completed before billing the customer for changes and extras. At that time, details are liable to be not as clear. Invoice and get paid for extras as soon as they are completed.
From the start, state that you bill for change orders immediately and that you COLLECT for change orders. If a customer requests additional work and theres a balance due, notify them that no service or warranty work and no change orders will be completed until the balance is paid in full.
Remember that change orders cost more money in labor and material. Dont ballpark your quote. Its better to submit a price after a couple of hours or the next day before submitting a quote that will be wrong.
Charging on a basis of time and material reduces the incentive of the contractor to increase efficiency and thereby increase profit on these revisions. Its more profitable to furnish an estimate, and use it as a goal to improve upon. If your company is weak in the field of estimating, consider taking our estimating course.
It is important that all construction personnel comply with all company policies, and that includes change orders. Be sure to explain the policy thoroughly and clear up any misunderstanding before sending individuals out in the field. Also, be sure to provide this information to any new employees so that you can be assured that company policy is adhered to consistently.
Change orders are a normal part of the construction business. Anticipate - better yet go hunting for change orders! Understand the basic dynamics of the construction industry - jobs are competitively bid, and change orders are negotiated! Profits from bid jobs are always under pressure from the start due to both good, professionally managed companies, and from not so well managed companies. Ballpark bidding, hasty estimating, and a general lack of reading and understanding the bid documents will cost you money.
Bid reserves for unseen contingencies can no longer be counted upon to make good a bad bid. The job-cost estimate was (or should have been) specifically for what was called for by the contract documents, not what someone (now that the project is underway) wants. Businesses today cannot absorb extra work in the hope of getting more work from a customer in the future. When pricing change orders, do a full-cost analysis, not a quick, about, around, last time it cost, best guess.
Supervision of construction projects includes the management of field change orders. Change disrupts the plan that has been developed for the project. Change orders must include all costs associated with the disruption of the flow, rhythm and profitable management of the work progress.
On occasion, you may find yourself having to negotiate the pricing of change orders. Be sure that if your company is going to be forced into a negotiation, that you have a fighter in the ring. Not everyone is well suited for the task of negotiating change orders. Keep field personnels attention focused on building the job by having others prepare and negotiate change orders. Consider sending key personnel to special role-playing type negotiation and negotiating strategy seminars.
NOTE: For other closely related topics, be sure to review the newsletters on Contracts (#46), Job-Costing (Estimating Analysis) (#52), and Estimating (to be published later) in this series of articles on Financial and Job Management.
Mike Holts Comment: This newsletter was extracted from my Business Management and Management Skills Workbook. Watch for our next newsletter, and as always, we encourage your comments and feedback. Send us your real-life experiences. Please respond to Barbara@mikeholt.com.
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