This column originally ran in January 2002.
There was a time when change orders represented a large part of a company's profit on a project. This was particularly prevalent in commercial construction, where every proposal was bid by at least four companies. Most lowered their markups to win the bid, counting on change orders to make up the loss once they had the contract. Many residential remodelers have followed the same approach.
Protect Your Profit The problem with this strategy is that it's much more difficult to make a profit on change orders than on a total job, for several reasons. Customers often don't decide on a change order until the last minute, so work stops while the change is estimated, written up, and signed. Delays result while materials are ordered or delivered. Subcontractors may have to be rescheduled. The lead carpenter can lose time pricing and writing up the change, explaining it, and getting all the necessary signatures.
It's relatively easy for customers to find out the price of materials involved in a change order and to see how long it takes the lead carpenter or subcontractor to complete the work. It's also easy for them to conclude that the price is too high and that the project must also be overpriced.
Failure to write up the change order, get signatures, and collect promptly can also be costly. I know three remodelers who've each lost $40,000 in the past few years to customers who requested change orders then refused to pay for them at the end of the job.
Lead carpenters and salespeople should be trained to look for possible add-ons to sales that lend themselves to simple project additions, such as painting additional rooms, changing a countertop in a kitchen, or replacing a roof. But they should be trained to write up the changes properly:
Lay Down the Law
Your approach to change orders should be clear from the beginning of your relationship with a customer. Your sales presentation book should include a change order form/contract that illustrates the care and detail used to write up the order. Your customers need to understand that while change orders are encouraged so that they can achieve their desired results, changes will be at normal pricing only through the preconstruction conference, just prior to the start of work (this should give customers 30 to 90 days from contract to job start to think about changes). After the preconstruction conference, change orders include a setup fee ($50 to $75), in addition to the price of the work.
Your company can make the process easier by developing options for customers to consider before the contract is signed or during the setup period, such as material upgrades, electrical and/or lighting changes, tile, cabinets, and accessories for kitchens, baths, decks, and more. Make it clear in writing that if problems arise that could not be detected in advance — say, termite damage behind walls — a change order with the setup fee will be required to do the work.
Change orders will always be a significant part of your volume, so you'd better have a process that will satisfy your customers' needs and give you a satisfactory profit. —Walt Stoeppelwerth is a publisher of management and estimating information for professional remodelers. 800.638.8292; firstname.lastname@example.org;www.hometechonline.com.