In the general contracting industry, you may know to expect the unexpected when it comes to delays in bringing a project to close. Yet, do you really stop to think about the hidden variables affecting the completion schedule of a project? These days, some subcontractors are playing a game of change orders, where they are submitting incomplete bids and tacking on higher rates.
On average, change orders account for anywhere from 8 to 14 percent of capital construction projects.
When change orders happen mid-project, the cost in delays and construction schedule setbacks may be so great that you do what you can to resolve the matter quickly - no matter the cost to your bottom line. Learn how to limit the need for change orders and retain the most value on your end.
How Change Orders Can Be Harmful to General Contractors
Variations, back orders, errors, omissions, and other unwanted things happen; it’s a fact of life. Unfortunately, some dishonest subcontractors are using change orders to win contracts. They hope you’ll select the lowest bid to retain the most profits, so they submit incomplete bids.
To supplement their take, they then submit change orders at a higher than contract rate. This happens once the project is underway, when the owners feel committed to moving forward. Too often, the contractor gets stuck with the short end of the stick - receiving less so the job can proceed with minimal delays.
The good news is, there are ways that contractors can try to keep the construction project on schedule, minimize delays, and ensure that change order prices are fair. When the project is completed on time and the overall budget is respected, everyone is happy.
How to Avoid Getting Dinged on Change Orders
The best thing you can do to keep your costs in line is to spend more time reviewing bids and get more information about construction materials during the pre-bid process.
Are the bids and plans inclusive? If not, request a completed bid or seek another bid that is complete. If you move forward with incomplete bids, you are setting yourself up to spend more to bring the project to completion.
Once you know that you’re looking at a complete bid, review the products and designs. Become familiar with what is needed and how much it costs. This also benefits the client, because you can then explain the costs involved in switching from one material to another if they change their mind mid-project.
A manufacturer should be able to walk you through the project scope, recommend certain systems or products that will work with your client’s budgets and specs, and leverage their network of relationships with your subcontractors.
This allows you to get an inside look at the scope, receive a free manufacturer’s review of recommended products, and know the subcontractor you’re working with is already invested in the design and the bid.
When third parties have a stake in the design and the bid, they will be less likely to resort to using change orders to leverage more money for their work.
Finally, make sure that the project accounts for any infrastructure improvements that must take place. Too many times, a client agrees to a project and the contractor starts working only to find out that major electrical improvements are needed before the project can proceed. Suddenly, most of the budget has gone to update the electrical system and the client is forced to choose between spending more and waiting to do the project until he has more money. This is a lose-lose for all parties.
It’s always best to be sure that the scope is complete and that any infrastructure improvements are on the list before proceeding with the job. Again, a complete scope at the outset leads to complete bids, and decreases the likelihood of expensive change orders.
Additionally, you can develop policies around the way that you handle change orders, so that customers and subcontractors alike understand your process. Some contractors like to set precedent by charging for the first changes, even if they seem inconsequential. This sets a customer precedent that plans cannot change for free. Other contractors set a change order fee equal to 10-15 percent of the total order. This reinforces the idea that change orders are not free, since they cost staff time and money.
Instituting these policies in addition to other changes can help you recoup time and money you’re currently losing to change orders.
When you make these simple changes to your workflow, you will decrease the number and cost of change orders. You may also find that you attract higher caliber subcontractors. Clients may also be happier with the work due to the greater degree of transparency in your process and the trust they feel as a result. Limiting change orders will have a positive effect on many levels of your business.
This is just one crucial step to accurately estimating the cost of your project. For more, download our complete checklist.