A New View on Change Orders
Most people do not like change. While some forms of change can be exciting, most associate it with risk and uncertainty—especially project managers. Managing change in a project can be one of the most challenging aspects of the job.
Even the most well-planned projects are bound to have some form of change. This can range from something as simple as a paint color to something as complex as an unknown environmental hazard. Regardless of where it lies on the scale, the two biggest challenges with change are communication and profitability.
If you ever wondered if it is possible to measure how well a company communicates with customers, look no further than the Accounts Receivable Aging Report. I am not a gambler, but I would be willing to bet that almost all the money owed to a company in the >90-day column and beyond is the result of some form of communication failure associated with change. This becomes very evident when you start making collections calls.
The solution to this problem begins with the company’s change management policy. If your company does not have a written change management policy, I would highly recommend implementing one. The components of the policy should include the definition of change, methods of communication, responsibilities of the parties, the terms, and the resolution or agreement. This puts parameters in place that set appropriate expectations for both the customers and project managers. Any deviation from the policy should require management approval.
The definition of change is where most parties need clarification, because simple requests often turn into big issues when they are made repeatedly. In my opinion, change should be defined as: Any modification to the scope, schedule, or price constraints of a project. To be clear: you cannot have change in a project until you have a signed contract. Any modifications that occur prior to the execution of the contract are negotiations.
The above definition of change includes supplements to the insurance claim. All too often, restorers make the mistake of confusing the terms of the repair contract with the terms of the insurance settlement. While relative, they should be treated separately, because the agreements between parties are not mutually binding. In other words, just because supplemental work is necessary doesn’t mean that it will be agreed to, covered, or paid for by all parties.
All communication regarding change should be in writing. Some project managers operate under the misconception that the prolific use of change orders is a sign of weakness. This could not be further from the truth. Using change orders is a sign of strength, indicating that the project manager has a firm grasp on the project and communicates effectively. Even with the seemingly never-ending flow of verbal change requests, those discussions should be summarized in an email and copied to all project stakeholders before memorializing them in a change order.
One key element in a change order that should not be overlooked is a summary of the impact on the project deliverables, schedule, budget, or quality—including workmanship or manufacturer’s warranties. This narrative does not take long to document when drafting a change order and can be a critical component for communication with the customer. Incorporating it into the document forces the project manager to consider the impacts of the change and makes the customer acknowledge the impacts, which could include an extended duration of the project, different level of quality or workmanship than was originally expected, or even a void in the manufacturer’s warranty if products are not installed as intended.
Understanding that the list of change orders could potentially be lengthy for any given project, another recommended tool would be a change log. This is an on-going record of all change orders for the project, by number, and includes who initiated the change, the dates for request and approval, and the corresponding dollar amount of the change. This list should be easily accessible to all project stakeholders to improve transparency and communication.
It would seem as though the responsibilities of the parties would be clear in a change management policy. However, you would be surprised at the number of times I have heard a customer say, “I just assumed the employee would have communicated that information to the project manager.” Never assume anything when it comes to change and change requests. Clearly define both party’s responsibilities, along with including how change requests are made and approved, payment responsibilities, and terms for “out of scope” changes for work in addition to the contracted project.
Terms for change in a project vary greatly by company and industry. The most common practice among contractors is to charge a fee for change once a trade has started on the project. An example of this might be a change in paint color. If the change is made prior to paint work starting, then there is no fee. However, if a change is made after painting has begun, then a flat fee applies and is due at the time of the change order being executed.
Another common term that applies to a change is when you have an upgrade in materials or trade function. This could be a flooring change from carpet to hardwood, an upgrade in mechanical fixtures, or a reconfiguration of space during reconstruction. These situations involve increased time and cost and have in impact on the deliverables and quality of the project. My recommendation would be to enforce a payment-up-front term in the change management policy. This protects the contractor and, if desired, can also limit these types of change requests.
The idea of profiting from change in a project should never be a question in a contractor’s mind. Unfortunately, it seldom happens or is even given a thought. Instead, change is viewed as a burdensome inconvenience that sucks the profit out of a job by interrupting schedules and tying up resources.
I first learned about profiting from change as a college student working in sales for a local lumber yard. I would frequently do material take-offs for builders and bid on the lumber packages for new home construction projects. After the bids were submitted, builders would routinely pick apart the package and price shop the components. This frustrated me to no end! Upon discussing it with the sales manager, he proposed increasing the margin each time a builder made a change to the package. I balked at first until he asked me to consider the value of my time involved in rewriting proposals. I soon got the picture.
The same philosophy holds true in restoration projects. Not only is change time consuming for project managers, but there is a ton of opportunity cost associated with that time which could be used in more profitable ways on additional projects. This needs to be given careful consideration when deciding how much a potential change could impact profitability. Ultimately, the cost should be passed on to the customer in the form of increased margins with both positive and negative change orders.
The line item pricing in this estimate does not represent the actual cost of goods or services. Pricing for this project is based on the entire scope of work and may change subsequent to any modifications of the scope, quality, or scheduling constraints.
Positive change orders are fairly self-explanatory. If the customer wants to upgrade materials or add to the scope of work, it is only logical that the change should lead to increased profits. Where project managers get tripped up is with negative change requests where the customer wants to downgrade materials or reduce the scope of the project. The motive behind this is almost always driven by budget. Consequently, the scope reduction usually ends up being the highest margin services, resulting in a bottom line that doesn’t match up with the profitability goals of the company. The only way around this is to increase the profit margin on the scope that remains, or charge a flat fee for the change, or both.
To achieve this, proper expectations need to be established with the stakeholders up front. Going back to the communication side of the situation, I would recommend incorporating language into the repair contract or opening statement in the estimate, letting the them know that the line item prices in the estimate, if shared with them, are simply variables in the equation to develop the bottom line price for the entire scope of work. Furthermore, any changes to the variables will not necessarily result in an equal change to the bottom line. In other words, the estimate is NOT a menu of services.
Below is an example of what that language might look like. Feel free to plagiarize for your own change orders.
At the risk of sounding cliché, change is inevitable—especially on a restoration project. The customers who have sustained damage did not spend months planning for a restoration contractor to work on their home or business. Consequently, most of them are navigating uncharted waters. Understanding this makes any change request (within reason) understandable. But it doesn’t need to make it less profitable.
Instead of viewing change as an obstacle, I would challenge you to view it as an opportunity to improve the profit margins of your projects. Communicate your company’s change policy up front and effectively to the customers and project stakeholders. Get change orders in writing. Clearly define the responsibilities and terms. And, increase the profit margins on every change by either increasing the unit pricing or reducing the cost. Regardless of how you look at it, restoration project managers should always Change Up!