“Taking the time to present change order proposals with the same effort that we put into our regular proposals will make the process much smoother and simplify the change order process.”

We will always face change orders on our projects, it’s the nature of construction.  How we handle those change orders it what differentiates the Elite Contractors.

No one likes change orders, they hurt budgets, cause concern and put people at odds.  Pricing them can be difficult and submitting them to your client is not something we enjoy.  As Elite Contractors we recognize the issues around change orders and we use them to our advantage.

We need to put a more focused effort on all our change orders so that we can protect our profits and get paid for what we do.  Handling this in a professional manner can also help build our brand and make our clients want us back.

When looking at change orders we often discount them as a necessary evil.  As an Elite Contractor you need to take a different approach.  We should always look at change orders as a chance to sell ourselves and improve our project.  Looking at them under a different light will force us to put more effort into developing our pricing and our change order proposals.  This added effort will make negotiations easier and we will be more successful.

The first thing to consider when looking at change orders is properly calculating the cost associated with the proposed change.  To provide a detailed breakdown that the Owner/Client can clearly understand we need to separate our cost into 6 parts.  The first part is the actual cost of the change.  This is the section that will deal with the actual work that will take place and should include any credits for work that will not get done.  After calculating those costs we move on to the support costs associated with this change.  Will this change result in additional work by your project staff writing change orders , contracts or other things that support the work in the field.  the third portion of costs that we need to provide is any impact items.  Does this change extend the contract duration requiring us to recoup some PM time?  Will this change require some additional staffing or other costs that would not have been incurred if the change was not made?  After getting those cost calculated and listed we want to add our other direct costs like G/L insurance and bond costs based on the total change order costs.  Now we can add our overhead and profit markups to these subtotals.  If these markups are indicated in the contract then use the standard contract allowable markups.  If they are not then use the same markups that you used when calculating your original estimate.

Now that we have all our true costs calculated it’s time to present this to our client.  When presenting a change order proposal to a client we need to put together a detailed cost proposal.  We need to put the same effort into this proposal as we would if we were submitting a proposal on another project (minus the qualifications part).  The proposal should have a cover letter, the cost breakdown, supporting documentation and if applicable a value engineering proposal.  Make sure this proposal is clear and accurate.

By taking the time upfront to present your change orders as a complete package you will save countless hours of negotiation and discussions as well as set your company apart from the rest of the field.

Take-Action Items

1. Calculate the change order costs correctly

2. Present the change order proposal correctly

Outline

Change Order Pricing

What:

• We all get changes on our projects
• No one really wants them
• Our clients hate them
• Pricing and presenting them properly can set you apart from your competition

Why is it Important:

• We always want to protect our profits
• We want to get paid for what we do
• We can use change orders as a chance to sell ourselves

How:

1. Calculating the Costs:
   1. Actual Work Costs
      1. Include any credits for work not completed
      2. Make this very detailed
   2. Support Items
      1. PM time, Contracts, Pricing, Etc.
   3. Impact Items
      1. Extended duration, delay of other contractors, mobilization
   4. Other Direct Costs
      1. Other costs that are impacted by a change in the contract amount (G/L & Bonds)
   5. Overhead as %
   6. Profit as %
2. The Change Order Proposal
   1. Cover Letter
      1. Explain the change, outline costs, notify of time constraints
   2. Cost Breakdown
      1. Provide your detailed cost breakdown
      2. Make sure it’s clear and easy to understand
   3. Supporting Documents
      1. Provide all the necessary backup to support your change
      2. Provide additional information to support your pricing if applicable
   4. Alternate Solutions
      1. If you can, provide some value engineering solutions