This newsletter series will give you insights and techniques to help you build a better business no matter how large or small yours is. I always say that success comes from working on your business as opposed to in your business. I want to share with you the systems and philosophies that have been successful for me over the years.

This is newsletter #23 in the series. If you have missed prior newsletters, and are enjoying the series, we encourage you to purchase the program. More information can be found by clicking on the coupon at the bottom of this page.

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. It is imperative that any negotiation related to additional costs or time necessary to complete these changes is discussed prior to the issuance of the change order. Invoicing for changes at a higher-than-expected amount is an unacceptable practice and will almost always result in non-payment. Difficulties also arise in collecting on change orders because there’s a question about who ordered the change and lack of an authorized signature. If the general contractor’s 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. Change orders must always be documented and approved by a person authorized to request changes to the original contract.

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 there’s 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. To reduce collection difficulties, get in writing ahead of time, the name of the person(s) who can authorize change orders, and clarify the timetable for billing. It is poor policy to wait until the contract is completed before billing the customer for changes and extras. At that time, details may not be as clear. Invoice and get paid for extras as soon as they are completed.

Remember that change orders cost more money in labor and material. Don’t ballpark your quote. It’s 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. It’s 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.

Change orders are a normal part of the construction business and you should anticipate them. If someone wants a change that is unnecessary, make sure that your profits are high enough to compensate for all of your costs involved in making this change—see how badly they really want it. Remember though, that Change Orders are not a license to steal from the owner. Fair compensation is due, but gouging can turn a good job into a litigation nightmare, and your reputation as an honest contractor into something else.

You want the staff that represents you in the field to be respectful, polite, and reasonably accommodating when it comes to your customers but not to the extent that they might tend to see no harm in performing additional work 'on the fly'. It is important that all field 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.

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. It delays execution, delays parts delivery, and it tends to paralyze the workers. Change orders must include all costs associated with any disruption of the flow 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 every-one is well suited for the task of negotiating change orders. Keep field personnel’s 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.

The above content is extracted from Mike Holt's Business Management Skills Program.