Managing Change Orders is Critical to Your Success
Like National Geographic there are some topics worth revisiting every couple of years. Discussing the importance of managing change orders is definitely in that category. Estimating a job properly is very important, but managing a project and properly documenting changes is absolutely critical to a company’s overall success.
The first step for any company is ensuring that everyone in their organization appreciates that disruptions or changes to the normal workflow will add cost to the project. The second step is for all Project Managers, or anyone costing out change orders, to fully understand what those direct and indirect costs may be. Lastly, the individuals pricing out change orders need to be able to move them through the approval process by accurately listing and presenting the costs.
The first step involves understanding that building construction is similar to a manufacturing process. We estimate, plan and price a construction project based on a series of steps taking place in a specific order and within a narrow range of time. We have personnel and material in place to do the work and have reasonable expectations that the workflow will continue in an organized fashion. Like in a manufacturing plant, if the workflow is disrupted there are many activities down the line that will be stopped or disrupted and very likely need to be adjusted to get back on schedule. If these disruptions or changes are requested by the owner or are caused by the GC or other trades, then you should be comfortable in requesting additional compensation and time to complete the project.
For step two, let’s list a few of the direct and indirect costs that your staff should be aware can and do impact your profitability.
- Additional direct material and equipment costs
- Consider that the material may be purchased for a different price at a different time and could have separate delivery costs
- Equipment rental and small tool expense
- Understand how the direct labor to install the change request can be impacted
- Decrease in labor productivity
- Direct supervision for this work
- Other work may be suspended
- Work may now be out of sequence
- Time to analyze, discuss, estimate, manage and present the changes to the owner or engineer
- This should not be considered part of your company overhead as this time is directly related to a specific change request
- As-built drawings
- CPM revisions
- Cost analysis
- Indirect cost – this one is more difficult to calculate as these costs are not as obvious until the project is nearing completion. But they can have serious negative impacts on a project’s profitability.
- If the project schedule is NOT increased
- Crew size inefficiency
- Stacking of trades
- Overtime impact on productivity
- If the project schedule IS increased
- Increased job supervision
- Additional retainage interest
- Additional equipment and rental costs
- If the project schedule is NOT increased
Step three is as, or more, important than the first two steps. The Project Manager must be comfortable in preparing and presenting their documents and requesting compensation in terms of money and time. Consistency and confidence in pricing all submitted changes is paramount to gaining and maintaining trust with the decision makers. It is often suggested that submitting a sample change order before any work commences and before the first actual Change Request is a good way to establish credibility and work out differences in a non-combative environment. This will give the Project Manager an opportunity to discuss the process used to price changes, establish the labor column to be used (NECA normal, difficult or very difficult) and the material markup (Average Market Price, Trade Price, etc.).
You should also, review and be able to justify the use of other direct and indirect costs. Have a complete Rental Schedule with daily/monthly costs along with typical General Expenses that may be applicable. Show and discuss a composite Labor rate that may include Safety Meetings, Clean Up, Supervision and Guarantee of the Work in addition to the list of all employer burdens. The key is that you do not want to surprise the Engineer or Owner with costs they have not seen before. You also want to be consistent in applying these items across all future Change Requests.
Many conversations with Owners, General Contractors, and Subcontractors confirm that submitting easy-to-read, logical, and consistent change requests make it much easier for all parties to find common ground and approve the request. Of course, the ultimate quest is for a profitable project and a win-win for all participants. Changes occur on most every project so it definitely pays to make this preparation part of your company’s culture. Like National Geographic, we trust that a little knowledge will save you from going down a less profitable path while producing some great pictures of a well-managed project.