Management Talk: Change Work Orders

At least once a week, we hear from a contractor that can’t get paid for changes they’ve made to a job beyond the original contract.
I’ve discussed Change Work Orders (or Additional Work Orders) before, but we’re going to discuss them again because they continue to be a problem.
The most common mistakes made are:
1. No documentation. Any change to a job must be written as an addendum to the contract.
2. Making changes at cost only.
3. Not getting paid before making the change.
4. Communication issues between subcontractors, general contractors and owners.

No documentation
When a customer requests a Change Work Order (CWO) beyond the scope of the original contract, you should have procedures in place that take you step by step through the process of estimating, writing the CWO, collecting the money for that change, and then doing the work.
If the customer says, “While you’re here …”, your response should be, “Let me do an estimate on that change, write the paperwork, and then we’ll make that change.”
Don’t do anything until the Change Work Order is written and signed by the customer. If writing the Change Work Order impacts the job schedule, let the customer know. It should be their decision to make the change and accept a job delay, or not make any changes to the job. If your customer doesn’t like the price for the CWO, stay with the original contract and don’t make the change. You are under no obligation to change the contract.

Use your markup
Estimate the change, and markup that cost using at least your normal markup plus an additional 10 percent. For smaller jobs (under $1,500 in job costs), use a markup of at least 2.0. For larger jobs you can reduce your markup, but it should always be at least 10 points over your normal markup. The biggest mistake that contractors make is not using a high enough markup to cover the additional delays and costs that come with the CWO.

CWO’s take more time than if they had been on the original contract. With a CWO, you must stop what you are doing, estimate the change, do the extra paperwork, possibly run it by a plan check and maybe get another or a new permit, order and pick up the materials, and sometimes do extra demolition. A change to the job schedule may also result in cost increases from your subs. If you aren’t compensated, the CWO will cost you money.

We often see commercial contracts or contracts for custom homes written by architects or project managers that state contractors are not allowed to charge any overhead or profit on CWO’s requested by the owner or their representative (architects or project managers).

They believe that the overhead and profit agreed to on the original contract covers all the contractors’ expenses, and no more should be paid. Don’t sign any contract with that language. Do you think the architects make changes to their drawings without charging their normal rates, including overhead and profit, for that work?

If you are a sub or specialty contractor, you might believe you shouldn’t always charge for additional work. Knowing the fine line between getting paid for extra work vs. doing a little extra to “help out” is difficult.

There shouldn’t be any hesitation to charge for changes on a job. If the job changes, the price changes. This is business. If you have an agreement, and the other party wants to change the agreement in a way that costs you more time or materials, the price changes.

And please, if you are a general contractor and didn’t get a Change Work Order signed and paid by the owner before you made the changes on the job, don’t expect your subs to bail you out. Pay them for the work they did, don’t ask them to eat your mistake.

Get paid before making the change
Get paid for the CWO before you start the work. If you do not, you will always be at the risk of your customer having a bad hair day and refusing to pay you for that CWO. Time and again I hear from contractors about home or building owners who wait until the CWO is complete and then complain the contractor overcharged them. Get paid first.

No one, in the 46 years I have been in this business, has ever been able to explain why contractors should be expected to finance the work they do for home or building owners. If the customer doesn’t want to pay for the change up front, then simply don’t agree to make the change.

If you have a CWO that will be more than $2,500 to $3,000, then you need to get paid half of the amount before you start the change and the balance at the next progress payment. If there aren’t any more progress payments, then the CWO must be paid in full. Never let that final payment creep up over 2 percent, including any changes to the job.

Another issue we hear more frequently now than in the past are architects and lenders that don’t want the owner to pay the contractor for changes before the work is done. This is why you need contract language before starting a job that explains how Change Work Orders will be handled so this nonsense can be stopped. Remember, if you have a contract, you are not obligated to make any changes to that contract. If they don’t want to pay, don’t make the change.

Communication issues
If you are a subcontractor working for a general, be sure to have a written agreement prior to performing any jobs that outlines the general conditions under which you will work.

Then, for each particular job, you should receive a set of plans and specifications outlining your part of the job. Provide the general contractor with a firm price quotation for that job; get a signed agreement and your normal down payment.

Then, when the general contractor does come to you with a change, calculate the cost, multiply the cost by your markup, write the change and the price on a Change Work Order and hand it to the general contractor for their review and signature. You are to be paid 100 percent for the change on the next draw or the final payment for your work whichever comes first. Generals, that is fair.

But what if the owner comes directly to the subcontractor and asks for a change?
Generals, language covering this issue should be in every contract and in your sub-contractor agreements. If the owner wants a change, they must go through the general contractor. Always.

Sub and specialty contractors, please read this loud and clear: Never allow an owner to talk to you about a change on their job without the general contractor or the job superintendent present. There are no exceptions. If the owner comes up and starts telling you about the change they want, call for a timeout. Tell them politely you can’t make any changes to the job without the written authorization of the general contractor.

You have no idea what the general contractor said to the owner or if they have already quoted the owner the price for a potential change. Let’s suppose a general contractor has quoted the customer $4,393 for some additional work on their home or building. The customer, doing one of their “behind the back” things, comes to you and asks you how much the change will be. You give them a quote of $2,175. You now have created a problem between the general contractor and the owner that will be almost impossible to resolve. Don’t let it happen, deal with the general contractor only, and insist the owner do the same.

Michael Stone is a business coach and consultant with more than three decades of experience in the construction industry. He wrote the book Markup and Profit: A Contractor’s Guide, published by Craftsman Book Co. For Michael’s free newsletter, sign up at www.markupandprofit.com. Michael also is an experienced speaker and is available to speak at conventions and workshops. He can be reached by email at michael@markupandprofit.com, by phone at 888-944-0044, or on the Web at www.markupandprofit.com.

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