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The Business Blueprint - Handshakes Don't Count!

Notice, Documentation and Change Orders Doesn't it seem like there are three phases to most construction projects? — (1) Pre-Construction, (2) Construction and (3) Lawsuit? Contractors, subcontractors and specialty contractors are optimists. They bid jobs regardless of difficulty, location or size.

January 07, 2008

Notice, Documentation and Change Orders

Doesn't it seem like there are three phases to most construction projects?

— (1) Pre-Construction, (2) Construction and (3) Lawsuit?

Contractors, subcontractors and specialty contractors are optimists. They bid jobs regardless of difficulty, location or size. And, when they come in with the lowest bid, they think they are the only bidder who got it right regardless of how much money they left on the table. And to top it off, they'll sign just about any contract put in front of them, often after their work has started! As a general contractor who issues more than 250 subcontracts each year, I'm amazed by this. Either subcontractors and specialty contractors trust me completely, they can't read or they just don't want to deal with paperwork.

R-I-S-K

Construction is a four-letter word, and that word is RISK. It's a very difficult business, with lots of many moving parts. Contractors find themselves at the mercy of the project plans, changes, payment, scheduling, weather, labor, equipment, materials, and deliveries. So much can go wrong. So much is out of your control.

Your bookkeeper sees the real story on paper at the end of the job (when it's too late to do much about it). They see what the project manager has, or more typically, has NOT done, to manage the contract properly. Not paying attention to key contract clauses about change orders, notice and documentation is one guaranteed way to lower profits.

Contracting is About CONTRACTS!

Most of us don't like paperwork. But contracting is about CONTRACTS, and contracts are paperwork! Fifty percent of all profits on construction projects are made by managing the contract properly. Your contracts should protect you and define how you want to do business with your customer. Too many contractors will sign their customers' prepared five-, 10-, 15-, or 20-page contract without reading it or having their attorney review it, and without understanding the specific project requirements.

Have You Noticed?

One of the first things to look for in reviewing a contract is: What requires notice? "Notice" is proper notification to your customer about a change, conflict, incident, accident, or problem, within a specified number of days, and in a specified format (usually in writing). I recommend to review your contracts and prepare a chart listing the items requiring notice — along with the specific requirements. This "Notice and Documentation" chart must be referred to by the project manager, superintendent, foreman, and project bookkeeper throughout the duration of the project.

A phone call to the owner is not sufficient notice for any situation. Please contact the project administrator immediately to comply with the contract's written notice clauses with respect to all the above.

W.I.N. with No V.A.s!

In our construction business, we use the slogan: "W.I.N." — "Write It Now!" Contractors tend to postpone or delay notifying their customers of conflicts or issues. Or, they call and inform them, but fail to put it in writing until weeks or months later. Often contractors never put things in writing and then invoice for extra work without proper notice weeks after the extra occurred. This creates major problems trying to collect for additional and justified time, labor, materials, and job costs.

Another saying we enforce is "No V.A.s" - "No Verbal Agreements!" Verbal agreements aren't worth the paper they're written on. Properly record all verbal agreements in writing and e-mail or fax them to your customer the same day. Confirm these in weekly or regular project meetings and monthly reports.

Do You Document?

Does assembling all documentation, paperwork and information required by the contract to report issues and problems seem overwhelming? Just think: timely, complete and reasonable.

When you proceed without proper documentation on potential conflicts knowing there may be a problem, you are accepting responsibility for it. The project owner has R.W.R.s (Representations, Warranties and Responsibilities) including a reasonable schedule, professional contract management, timely response to contract issues, and proper payment per the contract. The general contractor and subcontractor's R.W.R.s include building what is contracted for and specified by the contract documents plus all contract requirements, documentation and notifications. By not documenting project problems and issues, subcontractors can inadvertently shift onto their own shoulders some of the owner's responsibilities!

If It's Not In Writing, It Didn't Happen!

As the third phase of construction can become a lawsuit, keep in mind it's not enough to have a legitimate claim. You must be able to prove it. Document situations as soon as the problem becomes known, or at least within the maximum number of days allowed by your contract. I have served as an arbitrator for the American Arbitration Association on a number of construction lawsuits. In most contract disputes I've evaluated, the problem could have been avoided if the subcontractor had notified the general contractor in a timely manner. The majority of problems occur when contractors try to request monies for extra work done weeks or months later, without timely documentation back up their request. Some examples of situations needing documentation:

  1. A plumbing contractor proceeds with installing underground sewer using plans that don't give exact dimensions of the pipe's location. The plumber has now accepted the responsibility for poor plans by installing the pipe in a potentially wrong location. Proper documentation of this situation as it occurred, including specific references to the conflicts or omissions in the plans, puts this problem back on the project owner's shoulders.
  2. A contractor digs a footing, discovers an unforeseen condition, fixes it, then several weeks later notifies the owner they hit an underground structure and spent additional monies remedying the problem and expects to get paid for the additional work. The owner does not have any liability to pay for extra work performed, installed or completed without proper notice, documentation and authorization per the contract.

Your contract will specify how many days you have to notify the owner upon discovery of a differing condition on a job site. Document it, including written proof and photos, show how you mitigated or intend to mitigate the damages, and submit a claim and change order within the number of days specified by — again — the contract!

Monitor documentation procedures project managers, superintendents and foreman use on a typical project. Make sure site problems and subsequent changes in project schedules and expenditures are "noticed" and well documented to make your requests clear, understandable, timely, and in the black.

Some Things Never Change ...

... including the realities of change orders in construction. Change orders are not "extras." They are additions, changes and deletions from the contract scope of work. Somebody changed the scope of work, not you! The project owner, architect or engineer didn't prepare proper or complete plans or specifications. Never give your work away. Your company has a right to collect for additional work and extended time when somebody else changes or modifies your scope of work or schedule.

The typical scenario, however, goes like this: a subcontractor walks into the general contractor's office with a list of change orders that occurred two, three and even four months prior and asks to get paid for the extra work involved. You can quote me here: "If it's news, you lose!"

Two Types of Changes: Wanted and Unwanted

Change orders fall into two categories:

  1. Owner-requested changes — those requested by the owner, architect or builder — like upgrades and additions.
  2. Constructive changes — those caused by differing conditions, field problems, conflicts, poor plans and specifications, errors, and omissions.

Needless to say, those in the second category come about because of unwanted or unexpected problems. They tend to make people unhappy. Unwanted changes present more problems for budgeting, scheduling and getting paid. Make sure your project manager keeps a log of potential or proposed change orders as well as executed change orders. Match each project's monthly budget report to the executed change order log to ensure an accurate committed cost, estimated final cost and anticipated profit.

On every project, review the general conditions in the specifications, general contract and subcontract to look for the timeframe allowed to request additional monies and time extensions for change orders. The requirements may be different for owner-requested changes and constructive changes.

While you are required to give notice of occurrences related to change orders, the project work will typically proceed while final change order negotiations ensue. Follow procedures established in the contract, and establish your own management procedures to track these incidents carefully and completely.

Use a Field Memo System

On the job site, a crew hits an underground water line not shown on the plans. With water spraying all over the excavated and open footings, what should the subcontractor do? Wait for a signed change order or take steps to mitigate the damages? Most 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. Consult your contract first as project requirements can vary. Always call the owner or contractor immediately and follow up with a faxed field memo no later than by the end of the day. By contract you are allowed a specific amount of time to request more money and time for the extra work and change order.

Remind project managers, and remind them again, to follow up any phone calls or informal conferences with a field memo "noticing" the change, whether it is owner-requested or constructive. Make sure they get it signed in a timely manner. Make sure a copy goes to the project manager and project bookkeeper so the contract requirements for billing change orders and reporting can be met.

The field memo system is a simple way to get a customer's signature authorizing you to proceed with extra work, and acknowledging that you'll agree on a price later.

Charge the Right Price

Most contracts delineate how to proceed with change orders. There are three standard ways extra work can be performed by contract. In the lump sum method, 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 their 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, they 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. However, change order prices often seem too high. Charge the right price the first time! 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 them, or I don't know what things cost. I then have to go back to my subcontractor and tell them to give me a fair price. I now don't trust my subcontractor, and he doesn't like dealing with me.

Extra Work Takes Extra Time

In every change order request always include the additional time required to perform the work even if it doesn't affect the critical path of the project. Every time you do additional work it takes additional time. No exceptions!

Get Everything You Can

As a general contractor, I review hundreds of change orders every year. I often see subcontractor change order requests that don't ask for everything the contract allows them to get. Look at your contract. Verify what costs can be included in change order requests. Always verify change order markup for overhead and profit in the subcontract, general contract and project general conditions in the specifications. The general contractor and subcontractors are only allowed to charge markup per the contract documents. Often the subcontract markup for change orders does not match the general contract. In these cases, the subcontract always overrides, because a specialty contractor is first held to the subcontract. Be aware of the different markup rates for contractors and specialty contractors on each project. Put these on the project checklist when the job starts. If you always use the same rate on every job, you can get burned by a different rate buried in a subcontract after it's too late.

A contract may allow a markup of 20 percent for labor, but only 10 percent for materials. Every job and every contract is different. Verify!

Get Wet Ink

A big problem for most construction companies is performing work without signatures on change orders. Everyone knows to get signatures as soon as possible or before proceeding on extra work, but project managers seem to delay this difficult task for several reasons.

Some project managers are good with paperwork, and some aren't. Those who have a weakness in this area need to be accountable and those who are overworked need support. Insist on documentation. Ask for details about project problems or tough customers. Help your project team put together the paperwork needed. Go to the customer with change orders quickly and accurately.

Train Your Customers!

Meet with your customers at the beginning of every project and tell them exactly how you want to business with them. Tell them up front, in advance, you will require signatures in order to proceed with extra work, you expect them to abide by the terms of the contract, and you will stick to it. Play hardball and be firm but fair. Your customers will respect you and treat you professionally. When you don't require the customer to honor their contract, and go ahead and do work without signatures, the customer then won't respect you and will take advantage of you. Play hardball and win!

Have you ever eaten $100, $1,000 or $10,000 at the end of a job because no signed change orders authorized the work? You can get all you deserve by following these solid ideas to ensure your change orders are approved, documented and noticed.


Author Information
George Hedley owns a $75-million construction and development company and Hardhat Presentations. He speaks to companies on building profitable businesses, leadership and loyal customers. He holds three-day in-depth "Profit-Builder Circles" open to construction company owners in an interactive roundtable format every three months. His "Profit-Builder System" includes proven tools to always make a profit, build equity, create wealth, win profitable jobs, motivate your people, and enjoy the benefits of owning a profitable company.
For information on Mr. Hedley's programs or to receive his free management e-newsletter, visit www.hardhatpresentations.com, call (800) 851-8553 or e-mail him at gh@hardhatpresentations.com.

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