Subcontractors are very frustrated with the unreasonable amount of time it takes to get a change order executed and the number of change orders they have to negotiate after the work is done. In the few months I’ve been consulting, I’ve received more calls regarding change order problems than I could have imagined. Here are some key change order issues you can use to create your own policy and procedures for change orders.
What I’ve learned in setting up comprehensive policy and procedures for subcontractors is that most subcontractors have a change order “procedure”. The procedure for the most part is what I would call “price and wait.” Meaning the subcontractor prices and performs the work and then waits for a change order. The reason they wait is due to common excuse such as, “It’s into the owner for approval or we’re waiting for other subs to submit their price.”
CHANGE ORDER REQUIREMENTS
Change order pricing is governed for the most part by the “changes to the work,” portion of the subcontract and main contract. When setting up change order policies and procedures I’ve found it best to base policy and procedure on the most restrictive contract language. In my opinion contractors like Skanska U.S.A., Turner Construction, McCarthy, and Hoffman have the most restrictive change order language; therefore I’ve based policy and procedures on the most restrictive of these large generals.
STEP 1: CONTRACTUAL OBLIGATION
The most restrictive contracts require that each change be accounted for separately from base contract work. Accounted for means, “accounting” or in other words all costs for a particular change must be accounted for because it is subject to audit, negotiation, contractual requirement and good business. The rules say, “… the subcontractor must substantiate every cost associated with a particular change.” If you don’t have the backup to substantiate your costs you lose leverage when the owner or GC says, “we think your price is too high” or “we just can’t sell this to the owner.”
If you want to solve the problem of having to negotiate change orders after the work is done you have to job cost each change order to substantiate your costs. If you don’t have the information, the only option left is to negotiate your price, which is simply negotiating against yourself.
The next big benefit in job costing each change is claims submissions when impacts occur. In preparing a claim you must keep base contract work separate from change order work. Combining base contract costs and change order costs creates an accounting nightmare and results in much higher claims consultation costs. A claims consultant must be able to analyze the base contract data separately from the change order data to identify and prove cost impacts.
There are other reasons why each change order work should be separated in the job cost but what is most important is that you are contractually obligated to job cost each change order, and its good business. It may create more work and the costs may not be allocated perfectly, but the benefits far outweigh the negatives.
STEP 2: ORGANIZE
Changes typically originate externally or internally. An external change normally originates from the owner, general contractor or possibly another subcontractor on a job. An internal change originates from you the subcontractor or from one of your sub-subcontractors or vendors. When reviewing a change request it’s important to identify who initiated the change request on a log. (see example below)
Giving each change an identifier (reference #) coinciding with the party requesting the change is important. I’ve seen subcontractors use their own tracking numbers or none at all which makes communication difficult when having to review.
The submitted date is the date you submit your price to the general contractor. Contractually, there is a limit on how many days you have to respond with a price or ask for an extension. Your contract also requires you to proceed, “only upon written direction.” Many subcontractors start change order work without written direction causing them to lose leverage and in the strictest language the right to collect because they didn’t get written direction.
The price submitted should be the same as the price you proposed to the client along with your qualifications and exclusions for a specific change. Knowing and tracking who initiated the change is very important. Knowing who is responsible for what gives you an advantage when forced to go directly to the responsible party. In other words, you might at some point have to go to the horse’s mouth when changes are not being approved or paid timely and you don’t want to go without knowing who the responsible party is. Going direct will also alert you to any change dispute between owner and general contractor.
T&M tickets, change order number, amount approved and change order dates are self explanatory; however the “disputed” column is very important. Change orders contain legal language that can waive your rights to collect disputed amounts unless those amounts are reserved on the change order and reserved on any conditional or unconditional lien waivers.
As a side note, be aware that more and more general contractors are writing “zero” dollar change orders. For example, you might receive a change order in the amount of $500 yet there may also be 25 zero dollar amounts included in your change order. Zero dollar change orders are brilliant as they are very effective in closing the door on a subcontractor, and his claims consultant due to the release language.
If you want to use zero dollar change orders to your advantage think of them as information you didn’t have before. You may not have been informed of hundreds of changes that took place on the job because there were no changes to your work; however, these changes may have impacted your work.
CHANGE ORDER COLLECTION POLICY
The company expects its clients to provide change orders for additional work performed by our forces in a reasonable amount of time. A reasonable amount of time is not longer than 60 days from the date the company completed the change order work to the client’s satisfaction. In the event the client does not provide change orders in the times frames described above, the company shall immediately file lien on the 61st day.
There can be several parts to this policy and several parts to change order procedures, but they can be simple. However, the policy must be clear and the boss needs to set the policy. In this case the boss is willing to give the owner/general 60 days from the date the change order work is completed to get him a change order, which is a long time and very reasonable. This policy allows the subcontractor’s project manager to do his job and that is, get the change orders so they can be billed. Not having a policy is like sending a carpenter to work without tools, and another reason why managers end up with a “price-and-wait” mentality.
Contractually, owners and general contractors have no motivation to process subcontractor change orders in a timely manner. As a result, it is the subcontractor’s responsibility to come up with consequences that might motivate the owner and general contractor to process change orders in a reasonable amount of time. Here are some examples of consequences subcontractors may want to include in a change order policy:
Add an interest qualification to your proposal for change orders not executed by a certain date, and reserve the interest on the change order/lien waiver.
Offer a discount if the change is approved by a certain date.
Tell the general that you want a meeting with the owner.
Justify charging more for changes as a result of the owners delay in approving changes.
Insist on a weekly meeting with the general to review the status of each change.
Include your change order policy in the subcontract.
File a lien to put everyone on notice that you’re not willing to let the owner and general take an unreasonable amount of time to approve your change orders.
You have all experienced what it’s like to more or less have to beg for change orders, and begging doesn’t make the process go any faster as you know. It’s become clear that subcontractors don’t want to upset their clients by making demands or filing liens. Although subcontractors are the victims, some owners and general contractors say demanding subcontractors are difficult to deal with. Interesting turn of events when demanding or securing your interest by filing a lien is viewed as being difficult?
The truth is that subcontractors finance change order work without reasonable payment terms. Another thought is is that subcontractors don’t want to upset general contractors by making payment demands. Subcontractors have allowed owners and general contractors to take an unreasonable amount of time to approve change orders at their expense. If every subcontractor filed liens when change orders were unreasonably delayed, the change order process would eventually improve and that is why subcontractors need to establish a change order collection policy and procedure.
Remember: Teamwork begins with a fair contract. W&C