I want to address change work orders (CWO’s) today, also known as additional work orders (AWO’s), because they cause problems for too many contractors. The problem isn’t making the change; it’s getting paid for the change.
How change orders go bad
You’re busy working on a job when your client says, “We want to put a new almond colored, dual glazed, vinyl sliding glass door in the west wall where the 6′ window is now. Can you do that for us?”
No problem! You were just starting to frame that wall so it doesn’t even upset the schedule. You know you should write a change order because you’ve read Markup and Profit; A Contractor’s Guide Revisited, but they’ve been great clients and you know they’ll keep their word. If you take the time to estimate the change, write the change order, and get it signed, you’ll have to stop the job and either pay your crew for down time or send them home. So you make the change and keep going.
When you meet to collect your next payment, you include the change for the sliding glass door. They gasp and say, “$3,011 for the door? We saw one at the Big Box Store and it was only $595. That’s outrageous.”
Now they start using a different tone of voice. “You know, we were warned that we’re paying too much for this job, and this confirms it. We want to see all your invoices and timecards. We won’t pay for the door, and we’re not giving you any more money until this is settled.”
If you think this doesn’t happen or won’t ever happen to you, think again. The nicest people can change in a heartbeat when money is involved.
It was an easy mistake to make. Your focus was on getting the job built. You wanted to stay on schedule, make the client happy, and move on to the next job. Paperwork took a back seat to the schedule.
What should have happened?
When your client asks for a change, remind them that the procedure for making a change is outlined in your contract (see language below) and you’ll need to prepare a change work order for their signature. Explain that making a change at this time will delay the job, increasing the cost. If possible, give them a rough estimate of the price of the change, but be careful, you want to guess high, not low. You don’t want them surprised with a higher price when you quote the price for the change.
If they agree, there are two ways you can proceed.
- Stop the job, estimate the cost and fill out the change work order form. Be sure to include the cost of stopping the job. Get it signed before proceeding. This is the best alternative.
- If you don’t want to stop the job and you’re confident of the cost of the change, write a change order on the spot, get it signed and proceed. This is risky, especially if you’re guessing on items that should be quoted by a sub. If you estimate low, you’ll eat the difference, but it’s better than proceeding without any signed agreement at all.
How do you price them?
Changes should be priced at no less than your normal markup plus at least 10%. The smaller the change, the higher the markup.
When you estimate the cost, don’t forget to consider the cost of third-party involvement. Let’s say the owner decides they don’t like the 8′ arch leading to the new family room, it’s too small. They want it 10-12′ wide. You know by experience that you’ll need an engineer’s approval for that change, as well as being approved by the local building department.
The cost estimate should include your time to assemble all the documentation, deal with engineering, run through the hoops for the permit, and any other costs you might incur. It doesn’t need to be itemized, but those costs need to be included.
Also, don’t forget the cost of delays with your subcontractors, extensions on leased or rented equipment, increased material costs, or employee down time while you work on the change.
When should you get paid on a change work order?
We talked about the payment schedule for changes in an earlier article, you can read it here.
Can you charge for changes?
Charging a fee for each change is absolutely acceptable, as long as it’s covered in your contract. It’s not uncommon to allow one to three changes for free, then charge $250, $350 or more (depending on the job) for each additional change.
What should be included on a change work order form?
Every change work order form should list 3 prices. It should list:
- the previously agreed contract price
- the price of this change or additional work, and
- the new adjusted total contract price.
By clearly listing the previous price, the cost of the change and the new total for the project, your client can’t claim they didn’t know what the changes would cost, or they didn’t realize how much the change impacted the final price.
Every change work order form also needs to list the impact on the job schedule. Whatever the change, you should extend the projected completion date. A rule of thumb is 2 to 1. For every day the job may extend, add two days to the projected completion date. Something may come up while making the change that will delay the job and you might need that buffer.
What if they balk or delay signing the change work order?
You can refuse to make changes if the owner doesn’t sign the change order form in a timely manner. Include language in your original contract as well as on the change order that states changes will only be made by mutual agreement.
If your client delays signing the change order, caution them that you will need to stop the job. If you don’t stop the job, the cost of the change will increase because work being done might need to be torn out to accomplish the change. In short, if they wait, it might cost them more money.
You can also force this issue by adding 15 percent to 20 percent to the price of the change if it isn’t signed in a reasonable time frame that allows you to keep the job humming along. Added expense tends to get attention. I think it’s reasonable to expect a change work order to be signed within 24 hours.
Does every change require a change work order form?
That’s your call. However, if you make a small change at no charge today, the client might be back tomorrow with a larger change and expect the same price. You can also be accused of changing the terms of the contract by not getting a signed change work order form. In my opinion, play it safe and write a change for everything and there won’t be any confusion.
Preparing for Changes
It’s important to include language in your contract that addresses how you will handle any requests for a change. This, and more detailed language, is included in our Fast Track Proposal Writer software:
(Contractor name) will provide a guaranteed price quotation based on all information provided by Owner, and guarantees Owner that no requests will be made for CHANGE WORK ORDERS or additional funds for this job as outlined provided the Owner does not make any requests for changes.
Owner, however, understands and agrees that if Owner requests or makes a change to the original contract, (contractor name) reserves the right to charge the Owner the sum of (change work order fee) for that change request and will estimate, write and present for Owner’s signature, a firm lump sum price quotation for the change, and a revised payment and completion schedule for the entire job.
Also:
Without invalidating this agreement, Owners may order extra work or change the existing Contract by the use of a CHANGE WORK ORDER, consisting of additions, deletions, or modifications (the Contract sum and the Contract time being adjusted accordingly) providing the document is mutually agreed to and signed by both the Owner(s) and (contractor name).
Modifications to the original Contract, or subsequent Contracts or CHANGE WORK ORDER may only occur with the signed CHANGE WORK ORDER. This CHANGE WORK ORDER may change the job completion date.
Only one (1) signature from each respective party to this agreement shall be necessary to execute the CHANGE WORK ORDER. Owner understands and agrees that a signature by one (1) owner constitutes a signature by both.
This sum shall be paid in full (100%), at the next progress payment due or the final payment due, whichever comes first.
(Contractor name) will not be liable for any changes made without a completed and signed CHANGE WORK ORDER. (Contractor name) will not be liable for any agreements made between Owners and any parties other than (contractor name).
Summary
If you don’t establish and follow a procedure for each change, and include language in each contract for the change order process, you’ll spend a lot of time and money on changes that cost you money. Make sure that any employees in charge of running jobs know how to handle a change on the project. When you have all changes documented with a signed change form, your business is protected and you’ll sleep better. Don’t make changes for free.
The knowledge and experience Michael Stone gained in his 60+ years in construction has helped thousands of contractors improve their businesses and their lives. He is the author of the books Markup & Profit Revisited, Profitable Sales, and Estimating Construction Profitably, and is available for one-on-one consultations.
Download the audio or listen here:
Subscribe to our newsletter and receive Chapter 1 of Markup & Profit Revisited
Our email newsletter is sent every first and third Wednesday with a link to new articles and a reminder of upcoming events. Unsubscribe at any time.
