John Kenney, Cotney Consulting Group
It is easy and stress-free when you start your business by working for friends, making verbal agreements, doing great work and getting paid for it. But in the real world of construction, you better get a signed contract and be prepared to handle change orders – in writing. There will always be “those customers” who will expect more than what they contracted for. You must clearly define the scope of work in the contract and include detailed pricing for any change orders. This protects you, your business and its reputation.
Without a contract, there can be no change orders. Contracts are of the utmost importance to hold both you and your customer accountable. If a client does not want to work with a contract, your best bet is to move on. Those are the same customers who will claim you promised extra work, even when you did no such thing.
Construction contracts are typically filled with clauses, but two major components must be included – the scope of work and price.
Sit down with your customer to work out every detail of the project. Include the cost of any potential change orders in these discussions. Use an itemized list, providing your customer more transparency, which will help you calculate the value of changes.
The contract should include a time frame for deliverables, default conditions, payment terms and penalties, allowing for added
work.
There are various reasons for change orders, from inaccurate specifications to drawing and design changes or a lack of coordination with various parties. Material substitutions can be problematic and may lead to higher costs.
Construction industry data indicates that change orders account for 8 to 14 percent of the cost of capital construction projects.
They can lead to cost overruns of 11 to 15 percent and push back project completion by as much as 20 percent. Customers need to know this.
By creating a change order process for your company, you can effectively moderate risks for disputes. Shared buy-in is essential for the contractor, the owner, subcontractors, consultants and customers.
A change order is an amendment to your original contract and creates a record of what you agree to provide to your customer, along with associated costs. Stay on top of subcontractors to ensure they implement agreed-upon changes.
Setting up your change order process includes work scope and what will come at an additional charge. Include pricing. If the customer adds more work, be sure to have a clause allowing for the delivery schedule extension.
Both you and your client should sign the change order. Your customer needs to know in advance that changes cost money. The change order process lays it out very plainly. Follow these steps:
■ Prepare a construction contract that clearly defines the scope of work to which you commit and the price it will cost. Review it with your client once it is completed.
■ Help the customer realize changes are allowed but that they must agree to changes in writing. You may include a clause in the contract itself, which the customer must sign, saying they understand changes come with an additional price.
■ When your customer requests a change, make it crystal clear that you are willing to do whatever they need, as long as they sign off on the agreed-upon terms. Spell out specifications clearly in the contract, establish your plan to initiate the changes and require payment. This can slow the number of change orders and limit unnecessary requests. Spell out who receives the change
orders and the timeframe in which they will be implemented. Review the project and its scope for errors, omissions and ambiguities that might cause problems. This review can lead to fewer complications down the road.
■ Sign the change order together and attach it to the original contract. Remember to bill your customer once the change order is complete.
Using a software system to manage change orders is a worthwhile investment for contractors. With so many new tech solutions available today, you can find templates that fit your change order process and capabilities that allow you to track approvals, making the process less cumbersome and much more efficient than emails and paper.
There may still be disputes, but when you document the facts and use the correct process, your business will be better protected and there will be less risk to mitigate so fewer liability issues.
Whether the contractor or the owner initiates a change order, handle each one expeditiously. Do not ignore or delay change orders. That could turn out to be disastrous for your project. Putting change orders off can result in later schedules and significant cost
overruns. Once a change is requested, make schedule adjustments and get to work to avoid any backlog, which could result in costly rework.
Consider whether you need to alter your current schedule to get change orders completed. Negotiate this with your customer to avoid falling behind on project timelines.
Finally, while change orders can be a touchy subject with some customers, always keep in mind that performing work beyond the contract’s scope can put you outside of your anticipated budget and timeline. So, managing expectations with your customer in advance can protect you. If customers know in advance what change orders entail and what they cost, it will help you fend off any complaints later that they did not get what they requested.
John Kenney has over 45 years of experience in the roofing industry. He started his career working as a roofing apprentice at a family business in the Northeast and worked his way up to operating multiple Top 100 Roofing Contractors. As Chief Operating Officer, John is intimately familiar with all aspects of roofing production, estimating and operations. During his tenure in the industry, John ran business units associated with delivering excellent workmanship and unparalleled customer service while ensuring his company’s strong net profits before joining Cotney Consulting Group. You can contact John at jkenney@cotneyconsulting.com.
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