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Recover Costs and Lost Time by Taking Control of Your Change Order System

That job taught us a lot about managing clients and changes. For one thing, we’ve learned to allow for twice as many changes as usual when clients say they won’t make any. We also realized we had to alter our change order system to recover the costs of each change and lost time.

Some builders use change orders to cover for poor estimates or to punish clients for late decisions or last-minute modifications. But if you consider change orders an integral part of estimating and project management and take the time to explain to clients how they work, you’ll eliminate confusion, have happier clients and recognize greater profits.

Successful change order management depends on three key components: setup, prompt notification and signed acceptance. Here’s how to incorporate them into your systems:

• The setup starts with a detailed budget that includes unit prices and quantities. An itemized scope of work backs up the budget. These two documents are benchmarks for managing your client’s expectations. If you clearly state what you agreed to provide for a certain price, there will be less confusion if the client wants to deviate from it later.

A schedule is a vital — but often neglected — part of the setup. Many builders are reluctant to give clients schedules because they don’t want to be pinned down. However, you need schedules to pin down clients. Make sure your schedule includes all the decisions clients are responsible for. That helps make them accountable for the job’s progress. They are liable for missed or delayed decisions as well as work they add to the schedule.

A contract is the final part of the setup. Your contract should state how you handle changes, mark them up and bill for them, as well as how you handle delays. Define all the possible unpleasantries that could occur in a project before the job starts. Set the rules early, when the atmosphere is cooperative. Addressing potential unpleasantries later, after they’ve become an issue, leads to increased frustration for everyone.

• Notifying clients promptly about additional charges for changes may seem obvious, but builders often wait until monthly bills go out to issue change orders. Instead, issue cost impacts as you go. A cost impact is a written estimate that includes the cost of the change, its impact on the budget and the client’s signature.

Adding the cost impact to our change order management system eliminates comments like, “I never knew that would cost extra,” and makes accounting for lost time easier. It also helps clients decide if they want to proceed with a change.

If a client approves a cost impact, do detailed pricing on it and then make it a formal change order. We don’t proceed with the change until the client signs off on the change order.

• Signed acceptance demonstrates and documents that the client received the change order and understands it. Builders often try to keep jobs going by starting work on changes without proper pricing and client signatures.

You can get away with that in a pinch if you at least get the cost impact signed, but it’s much better to take the time to do the change order properly and have the client sign off on it. Proceeding without the signature could cost you more than potential lost time.

John Barrows is president of J. Barrows Inc.,a Wainscot, NY-based custom home building and remodeling company, and is a member of NAHB’s Business Management and Information Technology Committee.

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