June 2010: Business Building
Words: George Hedley
Business Building
By George Hedley
On the jobsite, your crew hits an underground water line not shown on the plans. With water now spraying over excavated and open footings, should you wait for a signed change order to fix the broken line, or take immediate steps to mitigate the damages?
Why I didn’t get changes approved in writing
#1: “I’m too busy right now to get the signature.”
But never too busy to go to court!
#2: “I trust my customer, he seems fair!”
How much work will you have to do to pay for $10,000 in unpaid change orders?
#3: “Don’t worry, I’m friends with my customer.”
Friends sign and pay for change orders, enemies don’t.
#4: “We’ve got to keep the job moving, I’ll get it later.”
When we have no leverage!
#5: “I don’t want to rock the boat this early in the job.”
Training your customer starts at the beginning of the job!
#6: “My customer told me we’ll work out all the extras at the end of the job.”
When they’re out of money!
Most construction contracts have language allowing contractors to continue working, fix the problem, and keep the job moving. The key is to inform the general contractor or owner as soon as possible. Always call immediately and follow up with a faxed Field Change Memo by the end of the same day. Your contract allows you a specific amount of time to request more money and time for the extra work.
Field Change Memo
Date: 3/15/05
Project: The Perfect Project
Re: Broken Water Line
Field Item: Today, we hit an unidentified underground waterline while excavating footings along column line C. In order to mitigate the damages the gushing water was causing, we immediately shut off the water main, dug out the wet soil, re-compacted the sub-grade, and re-formed the footings.
Additional Cost: Cost Plus Work to be submitted and approved within 5 days.
Additional Time: 2 extra days
Sincerely, Joe Superintendent
Approved: Mr. Customer
The field memo system is a simple way to get a customer’s signature authorizing you to proceed with extra work, and acknowledging you’ll agree on a price later. The actual change order can involve many parties including the subcontractor, general contractor, construction manager, architect or engineer, project owner and lender. In a typical situation, the subcontractor submits a change order request. The builder’s project manager reviews it and submits a change order request to the owner. The owner has the architect or engineer approve it. And then, if it’s valid, the bank must approve it so the progress payment cost breakdown can be processed. Those steps can sometimes take three, six or 12 weeks. The final price of owner requested changes is usually approved prior to starting the extra work. On unwanted extras, most change orders are rarely approved prior to the start of the work.
Charge the right price
Most contracts delineate how to proceed with change orders. There are three standard ways extra work can be performed by your contracts:
- Lump Sum - A fixed price for all extra work required
- Detailed Cost Breakdown - A detailed estimate with backup
- Cost Plus - Actual costs of the work plus markup
The owner or contractor can require the subcontractor to perform the work lump sum” or fixed price for extra work agreed on prior to starting the work. With a detailed cost breakdown approach, the subcontractor can be required to present the detailed estimate with backup. If the general contractor or owner isn’t satisfied with either the lump sum quote or the detailed cost breakdown price, he can usually force the subcontractor to perform the work on a cost-plus basis.
Many contractors only like to work on a lump sum basis. I’ve been in business a long time, and I know what things should cost. If a subcontractor forwards an extra charge to me in the amount of $750 for a $200 item, and I submit the bill to my customer for approval, my customer will think I’m either trying to gouge him, or I don’t know what things cost. I then have to go back to my subcontractor and tell him to give me a fair price. I now don’t trust my subcontractor, and he doesn’t like dealing with me. When a lump sum estimate is rejected, negotiating over price ensues using the detailed cost breakdown method. Agreements begin and enemies are made at this level. Charge the right price the first time!
Extra work takes extra time
In every change order request, always include additional time required to perform the work, even if it doesn’t affect the critical path of the project. No exceptions!
Get paid for what you do by putting it in writing, every time. Start using this Field Change Memo system and you’ll improve your collection ratio.