Converting Change to Cha-ching!

Vince Bailey

November 2009

"It’s been a long, a long time comin’, but I know a change gonna come.”
—Sam Cooke

How many times have you seen the boat at the marina or seen the photo in which the yacht or the opulent houseboat is named "Change Order” and the dinghy alongside is called "Original Contract?” Well, that might be a bit of an exaggeration. Still, there is no question that change orders can be a lucrative supplement to the performance of contract work, but not until you’ve physically got the check in hand. As we suggested last month, many general contractors are mysteriously reluctant to actually pay on change work, and so it seems appropriate at this writing to share a few rules of the road on getting paid.

Rule #1: Get ink! First and maybe foremost, do not allow your field personnel to start performing any change work unless and until you have some sort of written directive, signed by an authorized agent of the GC to perform the change. There is likely a clause in your contract that says you have waived your right to recover without a written directive. Despite this, the GC’s super will invariably hear the rumor of an approval for a change and issue a verbal OK to your foreman without your knowledge.

So, be clear and be firm in communicating this cardinal rule to your field leaders, and repeat it often, as I do here: No work will be done on a change without a written and signed directive, period. If your foreman violates this commandment, or if he can’t seem to recognize the difference between contract work and change work, replace him; he has no business running your work. I know it seems harsh, but he is the source of "that giant sucking sound” you hear in your worst nightmares. He is giving away your leverage, and will likely cost you more in lost receivables than he will ever make you as an otherwise-effective foreman. So, give him the boot. Your decisive action will send the message to your other foremen that you are gravely serious about this issue (you should be), and they’ll think twice about giving away the farm themselves.

Rule #2: Create an effective work order system. Needless to say, there will be occasions when an urgent change will require an "end run” around the often-cumbersome change order process, and a work order will be opened to track actual cost. Rule #2 reinforces and expands on Rule #1 and might be subtitled "get ink on the run!” So compose your own form that accommodates these frequent emergencies to your advantage. A good work order form allows for the up-front authorization of change work performance and also allows for the tracking of costs incurred and for the daily verification of those costs (labor hours and material items) by the GC’s authorized agent. A model form may consist of a numbered front page that accommodates a detailed description of the scope of work, a signature line for authorization to proceed, and a tally section to total up the costs when completed. Successive sheets, designated with the corresponding number from the front sheet, should be designed to capture hours incurred by individual workers and their particular trades for a given day, to be signed off on daily by the GC. If properly crafted, this important document serves as a quasi-change order and will prove itself invaluable in the receivable department (see Rule #4 below).

Rule #3: Be the squeaky wheel. Get the change costs in front of the GC’s project manager as soon as possible and as often as possible. Write up a summary of completed items every couple of weeks, send them off, and get a confirmation that they were received. This accomplishes two objectives: It prevents sticker shock on the GC’s part (feigned or sincere—I can never tell), and it keeps the legitimacy of the change fresh in his mind. Incidentally, and this could be dubbed "Rule 3a,” never concede to the GC’s inevitable suggestion that you can "settle up at the end of the project.” This is not a poker game, and you are not a lending institution. Remember, it’s all about getting paid—the sooner the better. This segues nicely into Rule #4.

Rule #4: Assert your own rules. Do not wait for a formal change order from the GC to bill for completed change work or change work upon which you’ve incurred significant costs in one month. Simply enter them on the billing form with their designations (for example, "work order #1265” or "RFP 12”) and attach a copy of your work order or pricing breakdown, and let the GC worry about his own formalities.

Remember (review Rules 1 and 2): Your approved, pre-priced change or your properly executed work order qualifies as a written change order under the terms of your contract. Don’t be shy—bill for it!

Rule #5: Buddy up! Befriend the GC’s project manager with two "thou shalt nots.” The first one, which could be called Rule #5a, is this: Never gouge. No need for it. If you are capturing all of the legitimate costs, then a fair markup is all you should expect from a change. I should mention Rule # 5a-1: If you violate rule 5a, never get caught. The second "thou shalt not” is also Rule #5b: Never nickel-and-dime the GC. But always issue a no-cost statement to show how magnanimous you are. Then, tack it on somewhere else.

There you have it. If you faithfully follow these simple rules of the road, your chances of getting paid—and getting paid promptly—will increase tenfold. And you can take that to the bank!

Vince Bailey is an estimator/operations manager for San Juan Insulation and Drywall, Durango, Colo.