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Tuesday, October 30, 2007

This image of the yacht "Change order" moored next to a tiny dinghy "Original Contract" has been making the rounds of viral email in architectural and contractors' offices for the past several weeks. Dozens of people are trying to find who owns the boats -- I can tell because of the number of daily 'hits' from Google searches to this blog using the relevant keywords.

When you put a cross-section of the construction industry in a room for a public forum on the topic, such as at a recent Ottawa Construction Association gathering, you'll hear the often-stated line: Change orders are inevitable, best avoided, and generally are ideally resolved early on in the process through good project co-ordination.

But the underlying issues here are not so simple.

One of example in my Seven Tips for Construction Marketing Success cites a (necessarily) unnamed Pennsylvania general contractor who constantly wins local hospital work, despite the hospital's requirement that all jobs be publicly tendered and awarded to the low bidder. In this case, the GC and hospital administration have an unwritten agreement that the scope of work would be loosely defined, with pre-planned Change Order opportunities. Knowing this, the GC always bid low, with the clients' understanding in advance about the impending Change Orders, which are accepted and paid without fuss.

You might not like the ethical optics here -- but this is a blog about construction marketing, and clearly the contractor has done something right, to virtually guarantee a win every time.

So, are change orders part of the marketing mix; and how do you handle them effectively and creatively? Within the next few days, I'll be communicating a survey on the topic, but these thoughts come to mind.
Do some contractors bid low, knowing that they can make up for lost ground with Change Orders? Absolutely -- and these contractors make sure that the right paperwork from owners is signed before they proceed (while perhaps conveniently forgetting to sign the paperwork for their subs and suppliers).
Do some owners and owners reps lay hardball with Change Orders? Certainly -- they refuse to accept them; or fight reasonable mark-ups, or dispute the details, knowing if they make enough noise and refuse to pay they can drag or force the General Contractor or sub trade into a "compromise" (capitulation?)

Are many change orders caused by sloppy documentation; perhaps caused by low-ball bidding by architects or consultants; or under-budgeting by owners, or simply because things are rushed because of a tight schedule? Certainly.

These questions explain why Change Orders are such a thorny issue within the construction industry. Each case is different, and in the end, the issue of whether Change Orders represent opportunities for profit; or challenges for conflict, often depend on the character and quality of working relationships.

From a marketing perspective, here are my tentative 'takes' on the situation. (I will revise my thinking here in the weeks ahead as I gather additional reader feedback.)
Your ideal circumstance is to achieve closeness with your client so your reasonable Change Orders will never be disputed -- you achieve this by your integrity and the quality of your working relationships (in extreme cases, such as the Pennsylvania hospital and contractor, Change Orders are worked into the process from the beginning to allow the 'right' low bid to win.)

Realistically, done right, and with thought, Change Order mark-ups can be highly profitable -- and if you are a general contractor or sub trade at the bidding stage and see that Change Orders will be likely, you can, and should, factor your knowledge into the bidding process (but be very careful about this -- if you know the 'higher ups' will fight Change Orders, or you don't know their attitude towards them, you are taking a big risk, and if you see the mistake before bidding to a trusted GC/Owner, isn't the right thing to do to tell them about the problem and likeliness of change orders in advance, even if that means an addendum is filed and someone else comes in low as a result.)

Change Orders should be resolved and documented early in the process, and pre or early-stage project meetings are helpful in discussing potential problems and possible solutions.

If you are a lawyer or forensic consultant, watch for marketing opportunities where you see lots of Change Order tension. A good dispute over Changes can produce many billable hours!

Note: See this posting from March 24, 2009, where the original photographer reports he took the image while in Vermillion, Ohio in late July 2007.


Sonny Lykos said...

This paragraph caught my eye:

“You might not like the ethical optics here -- but this is a blog about construction marketing, and clearly the contractor has done something right, to virtually guarantee a win every time.”

My entire life I have placed an exceptional high value upon ethics and honesty n both my personal and business lives. I will not compromise them for any amount of money. Here’s my philosophy:

There is a balance of scale. We got something in return for what we do. Keeping that in mind, I am tempted to shred my integrity and honesty for what? - money. So what does that money do for me, a more expensive car, more expensive dinners, a larger house, perhaps increased monies for investments? All either “stuff” as in material items, or investments that may prove to be profitable investments, what subsequently get me more money.

So how does one equate his/her reputation with mere money? Is one so shallow that ill begotten gains are “rationalized”? Yes. That’s what most people do. Yet isn’t instant gratification embraced by children, not responsible adults. When someone speaks about me at my funeral services, should they speak of my material gains in life, or my character? What I was worth, or who I was?

I’m proud that what I have accomplished in life has been exactly because of my perceived and proven character by my customers. I wish a had a ten dollar bill for every time I was told “We trust you.” How could I even consider selling that trust and what it represents, for mere money?

Daniel Smith said...

Mark - I forgot to mention an interesting tidbit I came across at that OCA neeting last week-- I spoke briefly to Keith E. J. Dyer with Defence Construction Canada, and mentioned the change order boat, to which he replied "Oh, yeah, we've had that picture up on our office wall for years..."

So, perhaps not a new internet meme after all, but rather and oldie resurfacing?

Anonymous said...

Is it ethical? Why not? So long as you are not price slamming or financially raping the purchaser. It's been my experience that often with publicly bid contracts the contractor is supposed to put his intended markup for change orders and submit that as part of his bid package.

This brings up an other alternative for achieving low price... intentionally bidding to spec knowing it may be wrong. As soon as you are awarded the contract you submit a pile of change orders with copied manufacturers specs and building codes. The price just jumped exponentially.

Sometimes the orginization the engineers try to create actualy creates confusion. Sometimes that confusion is in our favor, if we can catch it in the bid stages.


Sonny Lykos said...

Many years ago when I did bid on jobs, any time the plans or specs ere deficient, I brought it to their attention via a letter noting each ambiguous or erroneous spec asking for corrections and/or clarification. I would have expected the same from a shop working on my truck’s transmission or rebuilding a carburetor.

And as far as Change Orders, on major remodels I initiate a procedure to use invasive inspections which exposed situations that may have mandated a Change Order.

Far too many contractors who build commercial projects, as you stated, love ambiguity so they can take advantage of them. I often wonder if these same caliber of people would take advantage of a blind person.

While I’ve never been a particularly religious person, I have always run my business and personal life by the Golden Rule. I not only expect, but in fact, demanded the same from by employees, subs and suppliers. Otherwise, once “my” trust in someone has been betrayed, it’s the last time I do business with them because in my “perception” they are no longer to be believed regardless of what comes out of their mouths.

I’m simply not into deceitful or manipulative tactics, business or otherwise. And if someone makes a mistake that may cost them money or time, I bring it to their attention ASAP. And as I stated, I would expect the same if I made an error, not have that error be used as an opportunity to take advantage of me.

But I’m not a typical contractor. In fact, it was not unusual for me to tell a sub that I increased his bid by “X” amount because I thought he made a mistake, ot because a particular customer had a bad habit of constantly talking to the technicians, obvious decreasing their efficiency.

I had a lengthy discussion about this with an older brother who is a professor of IIT - Illinois Institute of Technology. He was one of the initial faculty group that created a series of classes (still on going) emphasizing how professionals (they call them “disciplines) can work together as a team to better achieve a project. It’s called IPRO - Interprofessional Projects Program.

I think many of those in our industry would benefit from their classes. However, the only caveat is that it assumes a certain sense of integrity and sense of teamwork as opposed to an adversarial or parasite/host relationship.

Sonny Lykos said...

I'd like to follow up on this because I think it's an important issue in our industry.

Here’s the problem I see with the Pennsylvania GC and his relationship with the hospital administrators.

The people represented by the administrators are being denied the opportunity of obtaining the best price for the project by the arrangement between the administrators and contractor. They are also being led initially to believe that the contract price will be the final price. That contractor/hospital relationship in itself is a deceptive practice to those they represent.

For the purpose of the bidding process, the administrators have eliminated any bidding, and at this point it doesn’t matter why they have come to this “arrangement” with the contractor, only that they have, and in doing so they have violated their fiduciary responsibility to those they represent.

Any one in the construction industry knows very well that there are ways to ascertain deficiencies in blue prints and specifications for new construction and how to determine potential hidden problems in remodeling “before” any price is estimated. So one must then ask why no attempt is made to clarify potential problem areas, again, “before” a price is estimated.

I like this manner of doing business to me hiring a painting contractor to paint the interior of a customer’s home, only to be told upon the starting date that since the home currently has yellow walls, my customer must pay more since yellow is more difficult to cover in one coat, mandating two coats. This is the same painter who, upon inspecting my home, obviously saw the yellow painted walls. In this scenario I represent the hospital administrators. Should I tell the painting contractor to go ahead and just create a Change Order for my customer under the guise, or using the “rationalization” of me knowing the contractor does excellent work?

In my opinion, deceptive practices can never be justified any more than when an employee steals from his employer, justifying the act by telling himself that he deserved the raise he didn’t receive. And that’s the problem with far too many people, their cavalier attitude of rationalizing unethical acts to get what they want. We know what the GC wanted, being awarded the project. We don't know what the hospital administrators wanted, and obviously got. Either way, the agreed upon tactic is tacky!