Are you getting paid what you should for your change orders? Or, at the very least, are you covering your actual costs? According to Matt Firestone and Jim Johanneman of Lincoln, Neb.-based Firestone Consulting Group in their NECA Live seminar on October 7, “the easiest way to make money on change orders is not to lose money on change orders.”
Starting off the session, "Get Paid More for Your Change Orders," with a question, Firestone, president of the consulting firm, asked the virtual audience how many times one of their customers or the general contractor (GC) started a conversation with one of the following lines: “That should be included. Since it’s open any way… But you get it wholesale. It’s only a small change. While you’re at it… It’s easy for you. I have an idea. I need a favor.”
We all know the answer to that one — too many times to remember. Firestone and Senior Consultant Johanneman quickly dove into best practices for how to overcome change order pitfalls and maximize the amount of money you can charge for them.
According to Johanneman, change orders are inevitable on almost every project. Whether they come in the form of owner’s wishes, errors, omissions, deducts, code changes, unforeseen changes, damages by other contractors, emergencies on the job, or favors, you (as the subcontractor) have to deal with them. And if you don’t manage them correctly, you’re going to experience a loss.
“If it walks like a duck, and quacks like a duck, it’s a change order,” Johanneman quipped. “Any way you look at it, it’s additional work that’s typically outside the general scope of the original contract.”
The pair reviewed the four characteristics of a change order, including:
- The additional work is outside the general scope of the original contract.
- The additional work is not necessary by the fault of the contractor.
- The contractor gives notice that they consider the work to be extra and not assumed to be voluntary or a freebie.
- The contractor incurs additional costs.
Johanneman went on to describe some of the sins contractors tend to commit when it comes to change orders that lead to trouble, such as thinking they’re too busy to get the signature right now, blindly trusting the customer, not saying anything because the customer is a friend, not wanting to rock the boat too early in the job, moving forward to keep the job moving at all costs, and figuring they’ll work on the extras at the end of the job.
“If you wait until the end of the job, there will be so many reasons for you not to get paid — and you’ll need cash,” he said. “Then you’ll be in a weak position to negotiate your way out of it. When you’ve committed to a number, before you know it, you’re up to tens of thousands of dollars that you’ve agreed to do before you know that you’re even in the hole.”
There are four main types of customers in this world, explained Johanneman. 1) Those who play fair: You do your part, and they pay you. No questions asked. 2) Bargain hunters: They’re looking for a deal, wanting to save a little here and a little there. 3) Grinders: Clients who are always asking you to sharpen your pencil, and will be the black hole for your profit. 4) The thief: Those who will lie, cheat, and steal to get you to do more work than you will be paid for.
To avoid problems with all types of customers, Firestone recommended the best thing any subcontractor can do is understand their contract. “You don’t want to wait until you need to submit that change order to start figuring out the details — you need to read that and understand it on the front end,” he said. “When you’re negotiating the contract, that’s when you want to put your best foot forward and have documented proof of what your overhead is.”
According to Firestone, time is crucial when dealing with change orders, and it’s important for subcontractors not to initiate change orders. “We don’t want to surprise our customers, so bring issues to their attention as quickly as possible,” he said. “Your greatest leverage in negotiating is truly prior to any of the work being completed. After the work is completed, the leverage shifts to the customer — whether that be the owner or the GC.”
Let the customer initiate the request to make the change, Firestone advised. “You can bring the idea to the customer, but have them request that change,” he said. “And get everything in writing. Written requests are going to be so much more enforceable in court than that gentleman’s agreement or handshake you might have. Even if it’s at the expense of holding up the schedule, document in that change order that you need to get an extension or use that as part of the leverage as you negotiate the change order to not slow down the project.”
Citing a quote from Newspaper Columnist Molly Ivins, “Pigs get fat; hogs get slaughtered,” Firestone reminded the audience it’s always a good idea to expect the unexpected. “We’re not trying to be greedy about this, but we also know statistically that not 100% of our changes are going to be accepted,” he said. “We’re probably going to have to negotiate on some of those change orders, so we do want to give ourselves a little bit of negotiating room but not at the expense of greed.”
Another key theme reiterated multiple times throughout the presentation was the importance of consistent, detailed documentation. “When you’re doing multiple projects for that same customer or GC and you have multiple people in your office working on them, what happens if one of those project managers provides a greater level of detail than somebody else?” Firestone asked. “You just opened up a complete can of worms, but if everybody is consistent you alleviate a lot of those headaches around the documentation process of change orders.”
Prepare every document as if you have to litigate, recommends Johanneman, who also advises subcontractors to take as many meaningful photos with time stamps on them as possible. “Other people have to understand what you put together,” he said. “It’s something I drive into all of the project managers’ heads I work with — document to litigate. It doesn’t mean you’re being uncooperative; it just means you’re acting like a contractor.”
If, for example, someone tells you over the phone that you can change the wire from copper to aluminum. “As soon as you get off the phone, send an email back, memorializing the agreement you just made,” he said. “Document to litigate because that might come up at the end.”
To improve your change order acceptance rate, the pair reviewed five best practices that will help you maximize the amount you charge and increase your success in the acceptance of change orders:
- Know when you have the most leverage.
- Document, document and document some more.
- Be timely in your preparation, submittal and billing of change orders.
- Be upfront with how you do business.
- Be in control of decisions that impact your business.
Lastly, they stressed the importance of getting an authorized signature before starting on any work. “Don’t be the bank; get paid when the change order is authorized.”
