In the contractor world, costly change orders are the rule, not the exception. Often, there is an inability for contractors to keep the bid as the target, rather than just a starting point. The bid must document and demonstrate vital information and remain the benchmark for the project. However, beyond the bid, undocumented and unchecked change orders and work performed move the project away from the targeted price. This leads to an inability to recoup costs, leaving the company with a shrinking profit margin. Here are a few tips to head these battles off at the pass!
- Identification of risk factors before a bid is created helps alleviate the need for change orders. Assessment checklists evaluate information such as limited site access, environmental hazards, and/or unreasonable project schedules can help in the preparation of budgets for time and materials. Using a cost engineer to identify risk before a bid is executed may require money up front, but, in the long run, saves the company the pain of losing revenue on unforeseen situations and nonbillable costs. Research on this level teaches a company to “self-edit” bids and build in special cost codes for future estimates. Using computerized software, such as QuickBooks, allows the company to memorize the template for estimates, which yields an easier “checklist” approach.
- “Since you are already out here, I’d like to add this to the project scope.” This is common at any level of service; however there is no insurance that you will be paid for these extras without having safeguards in place. Here are a few procedures to close the gap to these black holes:
- Develop a policy for a customer driven change order. There must be an isolaton of extra hours booked to change orders with cause and value for all changes.
- Create a confirmation process for all hours in excess of contract.
- Implement training for bid teams and foremen on the following:
- Specialize job codes to track time for extra work costs
- Equipment records that segregate extra work costs
- Cause and effect relationship for work delays
- Finally, for financial managers of the project, all estimates and change orders must be entered into a program, such as QuickBooks along with all associated costs per job. These should be posted and reviewed on a timely basis. It is important to understand that unless you are performing payroll on your own system and assigning each hour of regular, overtime and burden rate to each project, you are losing valuable information on the job costs. Financial scrutiny is imperative.
Whether you use QuickBooks or you use a similar accounting software, preparation, implementation and dedication to these factors increases your profit margin and puts you on track for future success in contract work.
