At a construction job site, your crew hits an underground water line not shown on the plans. With water now spraying over excavated open footings, should you wait for a signed change order to fix the broken line or take immediate steps to mitigate the damage?
Most construction contracts have language allowing contractors to continue working when there are emergencies: Fix the problem, and keep the job moving. But when added items are not emergencies, the key is to inform the general contractor or owner as soon as possible and get written approval prior to starting any extra work.
LIST OF EXCUSES
The following is a list of common excuses for “Why you didn’t get changes approved in writing fast”:
- “I’m too busy right now to get the signature.” — But never too busy to go to court!
- “I trust my customer, he seems fair!” — How much work will you have to do to pay for $10,000 in unpaid change orders?
- “Don’t worry, I’m friends with my customer.” — Friends sign and pay for change orders, enemies don’t.
- “We’ve got to keep the job moving, I’ll get it later.” — When we have no leverage!
- “I don’t want to rock the boat this early in the job.” — Training your customer starts at the beginning of the job.
- “My customer told me we’ll work out all the extras at the end of the job.” — When they’re out of money!
FIELD CHANGE MEMO
When issues arise, aways call, email immediately, and follow up with a Field Change Memo the same day. Check your contracts to determine the specific amount of time allowed to request a change order and settle on the money and time required for extra work.
The Field Change Memo should be dated, list the specific project, and detail the nature of the issue. As an example:
Field Item: Today, we hit an unidentified underground waterline while excavating footings along column line C. In order to mitigate damages the gushing water was causing, we immediately shut off the water main, repaired the waterline, dug out the wet soil, re-compacted the sub-grade, and re-formed the footings.
See attached photos: # 1 – 4 dated March 15
Additional Cost: Cost Plus Work per approved contract hourly labor and equipment rates to be submitted and approved within 5 days.
Additional Time: 2 extra days delay
Sincerely, Joe Superintendent Approved: Mr. Customer Date: March 16
SIMPLIFIED SYSTEM
This field memo system is a simple way to get a customer’s signature fast, authorizing you to proceed with extra work, and acknowledging you’ll agree on a final price later based on pre-approved rates agreed on and attached to your contract. The actual change order can involve many parties including the subcontractor, general contractor, construction manager, architect, engineer, project owner and lender. But always verify who’s authorized to approve anything which involves extra money, time, or changes in the scope of work.
In a typical situation, the subcontractor submits a change order request. The general contractor’s project manager reviews it and submits a change order request to the project owner. The owner has the architect or engineer approve it. And then, if it’s valid, the bank must approve it so the progress payment cost breakdown can be processed. Those steps can sometimes take 3, 6, or 12 weeks. The final price of owner requested changes are normally approved prior to starting the extra work. On unwanted extra cost items, change orders must be approved fast prior to the start of the work in order to get paid.
CHARGE THE RIGHT PRICE
Most contracts delineate how to proceed with change orders. There are three standard ways extra work can be performed by your contracts:
Lump Sum: A fixed price for all extra work required.
Detailed Cost Breakdown: A detailed estimate with backup.
Cost Plus: Actual costs of the work plus markup.
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. 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 then 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 must 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. When a lump-sum estimate is rejected, negotiating over price ensues using the detailed cost breakdown method. Agreements begin and enemies are made at this level. So, charge the right price the first time.
EXTRA WORK TAKES EXTRA TIME
In every change-order request, always include additional time required to perform the work, even if it doesn’t affect the critical path of the project. No exceptions! In your standard change order rate sheet, include a daily rate for extra work items causing delays. Get paid for what you do by putting it in writing every time. Start using this Field Change Memo system, and you’ll improve your collection ratio.
about the author
George Hedley CPBC is a certified professional construction business coach, consultant, and speaker. He shows contractors how to double their profits, grow, get organized, and get their company to work like a machine! He is the author of Get Your Construction Business To Always Make A Profit! available on Amazon.com. To talk, start a personalized BIZ-BUILDER program, or get his free e-newsletter, email gh@hardhatbizcoach.com. Visit his YouTube channel to watch his videos. To download online courses or get his contractor templates, visit www.constructionbusinesscoaching.com.