How to Accurately Price Change Orders

By Tim Faller

There are a lot of reasons we lose money in this business: estimating poorly, starting projects with incomplete plans and specs, writing insufficient contracts and improperly managing change orders, to name a few. Sometimes, the reason is obvious, like when we make an estimating error because we didn’t have time to put together a proper estimate and missed some critical information. Or we rushed into production with a vague scope of work and everything was an allowance. I’ve been in the remodeling business since the early 1980s and a consultant-trainer since 2000. Over that time, what I’ve gathered from personal experience and from the remodeling companies I’ve advised is the main problem tends to lie with change orders.

There are many ways things can go wrong with change orders: They don’t get written up because the change is deemed too small, or the field staff assumes the work is included in the job scope; they take too long to process and a protracted delay can convince the client that the extra work is part of the original contract, so they won’t pay for the change; they are inaccurately priced (more on this below); they are not clearly explained in the initial stages of the project and clients don’t understand the contract language on how the change-order process works; and they sometimes don’t account for disturbance days that inevitably delay a project’s overall schedule. (See “Getting Change Orders Right” (Jul/19) for more information on how to manage change orders and disturbance days.)

In this article, I focus on how to help prevent inaccurately priced change orders from becoming financial drains to your business. Because if you don’t track them in terms of profit and loss, there’s a good chance that your losses are occurring somewhere in the change order process. And that slippage can be incremental as you go through a project; you lose a little bit here, a little bit there, and then, boom, by the time you get to the end, you’ve lost a fair amount.

For the full article from the Journal of Light Construction, click here.