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Update we purchased his electrical estimating program after two years of posting this article on our website. The program is excellent!!!
Taken from "Electrical Contractor Magazine" written by
The complex nature of change orders has deceived the great majority of estimators and project managers into believing that all changes are a boom to the industry. From my perspective, it is sad to see so many fellow contractors losing money and not realizing the real cause of the losses.
This topic brings back memories of my early contracting days when, suddenly, I would switch from estimating a large project to estimating a much smaller change order, bypassing the mental adjustment.
I would approach the change order as if it were a complete and large project; one that would allow me the time to plan and coordinate the work, procure materials, tools and equipment; a project that required normal supervision and standard labor units; and, worst of all, I never realized, or accounted for, the adverse impact that changes caused to the base contract.
Very naively, I believed that changes were making me money. Was I ever wrong-I was losing my shirt on changes! In later years, I realized my mistake, and I always wondered how many fellow contractors had fallen into the same trap.
During the last five years, I've been actively involved with over 1,000 estimators and project managers through change order seminars and private consultations and I've realized that the great majority of them have the illusion that all change orders make money.
While conducting change order seminars with groups of 10 to 20 estimators and project managers, I always have a small change order appraised by each individual. Invariably, I will find huge price differences and various levels of detail. Usually, the higher prices come from the more detailed documents.
Let us project this scenario from a classroom to the real world. Three of these estimators/project managers have priced an identical change order for three different school projects with the same engineering firm. Three different prices are submitted-prices of $600, $1200 and $1500. Upon receipt of these quotes, what does the engineer think? Which price does he assume is correct? Obviously, the $600 price. What does the engineer think about the $1200 and $1500 quotes? Obviously, he believes that these contractors grossly overpriced changes in the attempt to make an outrageous profit.
Regrettably, this is a situation that we have put ourselves in-the engineer does not know that the $600 quote is a blatant mistake. Unfortunately for us, the low quotes have set the precedent for the industry. (Incidentally, my estimate for fair and equitable compensation on that change order would be $1800. According to my calculations, the other contractors would incur a substantial loss.)
If these losses are real, why do they go undetected? Simply because it is very difficult to track the costs of change orders separately, let alone assess the adverse impact that changes cause the base contract. Careful analysis will reveal that changes cause the following detrimental conditions:
- Negative impact on base contract.
- Excessive management time.
- Much lower labor productivity.
- Interruption and confusion.
- Installation mistakes.
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Aggravation and stress.
We, as contractors, are at fault for failing to educate our estimators and project managers to recognize the devastating effect of changes. We are also at fault for neglecting to provide detailed, accurate, and consistent documentation to support our quotes; and in many cases, failing to demand fair and equitable compensation. We usually have no problem justifying direct costs. We must remember that indirect and consequential costs can easily exceed 40% of the direct costs. These indirect and consequential costs are real, but it is extremely difficult, if not impossible, to estimate these costs with accuracy, because we do not know how many changes to expect during the course of the project, when to expect them, or how extensive the changes will be.
This is a very difficult problem to overcome and one that is causing the construction industry significant losses. If we are to take action, we must begin by providing our people a thorough understanding of the negative impact of changes to the base contract. Next, we need to educate them on estimating with accuracy the real costs of changes and providing detailed and consistent documentation to support our quotes.
Finally, we need to build our peoples' negotiating skills so that they can effectively convince the engineers, architects, and owners about the legitimacy of our charges. In addition, our people must be well-prepared to defend these charges, as necessary. We must dispel the misconception that all changes make contractors money.
I firmly believe that our problem is not as much the bottom line dollar of the quote, but rather, our failure to produce detailed, accurate, and consistent documentation to support our quote; and, above all, our inability to provide credible verbal explanations at the negotiation stage. Do not forget, if you want to convince someone else, you must be convinced yourself-strong belief in your claim is the most persuasive tool you have.
On the positive side, our change order seminars and change order programs have produced immediate and tangible results that have benefited our clients and are setting new precedents for the industry as a whole. These results have come from implementing the change order procedure outlined below.
Upon signing the contract documents, the contractor should request, in writing from the owners, the name of the person who has the authority to approve change orders and to represent the owner (normally called the "agent of the owner"). Once this person is identified, we must meet with him in order to establish some important parameters that will significantly contribute to a successful change order process.
At this meeting, preferably before the first change order is issued, we should negotiate the following conditions and charges in order to prevent antagonism and confrontation at a later date:
As contractors, we reserve the right to correct our quote for errors and omissions.
The quote covers direct costs only; and we reserve the right to claim for impact and consequential costs.
Our change order quote is good for acceptance within___days from date of receipt.
We request a time extension of _____ days.
Material pricing (usually Trade Service column 3 is acceptable).
Labor tables (usually NECA middle column "difficult" or the high column "very difficult," depending on the type of project).
Additional labor factoring for abnormal conditions as per NECA (i.e., building height, installation above 10 feet, extremes of weather, abnormal schedules, and abnormal peak work force, project location, and so on).
Labor supervision-NECA labor units do no include supervision of any type (25% of the installation labor is a good average).
Labor cost per hour for regular time and overtime.
Estimating time (this is definitely not an overhead).
As-built drawings (actual time and cost).
CPM revision and updating, relating to changes (actual time and cost).
Material expediting and cartage.
Safety.
Clean up and disposal.
Warranty for additional work and extended warranty on base contract (when applicable).
Audit cost contingency (if applicable).
Retainge interest (when applicable).
Restocking charges.
Overhead
Profit
Any other conditions that may apply to the particular project.
The best approach is to prepare a fictitious, typical change order that is very detailed and professional looking. Then request a meeting with the approved agent of the owner. This meeting should allow you to negotiate all the necessary and applicable terms and conditions.
Explain that this is going to be a very constructive meeting because it will simplify and expedite the change order approval process. This will help everyone avoid costly delays and will save time. Being well-prepared is crucial for a productive and successful meeting. You must be thoroughly familiar with the contract documents and have all the detailed documentation to support everything that you have on your change order. You want the agent to accept you as a credible and professional individual and a true expert in your field. Do not present anything on the change order that you cannot justify to yourself first or for which you are not prepared to fight. Remember, you have only one chance to make the right impression.
Be aware that the owner's agent will attempt to negotiate in the best interests of the owners. Therefore, do not expect him to agree promptly to all, or any, of these issues. Your knowledge, your documentation, and above all, your strong belief that your charges are fair and equitable are your best tools.
Start the meeting with a true statement, such as, "Mr. Engineer, the best change for a contractor is no change. Please do not issue change notices-they disrupt the flow of work and create a negative impact on the base contract. Let me finish my job as per the contract and do the changes after. Changes cause me the following indirect and consequential costs:
These are the most common causes for negative impacts on projects and, unfortunately, they cannot be assessed and quantified until the project is completed. Our studies indicate that, as a bare minimum, these negative impacts cost us the equivalent of 40% of the value of the change orders. In some cases, they exceed 100%.
It is a fact that changes disrupt the harmony of the work flow, causing losses. Losses lead to claims, and claims drain cash flow and human resources from both sides-contractors and owners. The only winners in claims are the lawyers. Proper change order appraisal can help all parties avoid the waste of cash and human resources and the associated aggravation and stress.
Before proceeding with any changes, make sure the change order is approved and signed by the authorized agent of the owner. If you fail to do this and wait until you have finished the work, you will lose your negotiating strength. This puts you at the owner's mercy!
If we follow these basic principles, perform an accurate takeoff of the charges, and apply the approved parameters, there should be very little, if any, room left for dispute. Be precise with your quantities and consistent with your material costs and labor hours, and you will have very few change orders rejected. Computer change order programs can certainly be an asset in this process, because they provide accurate, consistent, and professional appearing documentation.
In summary, you can spend time arguing with the owners and fighting claims, or you can invest a portion of that time in detailing your change order and creating a good working relationship with the owners and a sound image for our industry. We have lost enough money on change orders, let us not do it anymore!
To download a demo of BidWinner, Accubid's entry level estimating solution, or Time & Material Billing, Accubid's solution for service contractors, go to www.accubid.com and click on Get Demo. To order a demo CD of BidWinner, T & M Billing, or ChangeOrder, call 1-800-222-8243 or send an e-mail to info@accubid.com
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