MANAGEMENT CONSULTING How to Prepare for Change Order Confrontation Presented by: Ethan Cowles, FMI Corporation Copyright © 2014 FMI Corporation “No work shall be done without a written, signed and approved change order…” © 2014 FMI Corporation What Are the Issues with Change Orders? • • • • • • • • _______________________________________ _______________________________________ _______________________________________ _______________________________________ _______________________________________ _______________________________________ _______________________________________ _______________________________________ © 2014 FMI Corporation Schedule Delays Profit Erosion Change Order Mismanagement Customer Attrition •No baseline schedule •No schedule updating •No look-ahead planning •No urgency Creates Proactive Management •Failure to identify changes •Failure to negotiate changes •Failure to get paid for changes •Failure to manage changes Creates Well-Informed Customers Strategic Poor Document Control •No RFI process •Reactive document control •Poor submittal management •Lack of documentation Initiatives Provides Strong Documentation to Legal Cash Shortages General Conditions Overruns Poor Billings/ Collections Customer Dissatisfaction Ultimate Consequences •No feedback on budget •No field influence on budget •Reactive management •No inclusion in change orders •Poor invoicing •Poor collections •Lack of knowledge on finances •Poor cash management •Reactive customer strategy •Lack of “Client Ownership” •Lack of pertinent information Systemic Problems Project Management Improvement Provides Project Controls Inspires Entrepreneurial Instinct Increased Customer Satisfaction Increased Profit Margin Increased Customer Base Decreased Legal Expenses Provides Project Performance Measurement Process Improvement Features Process Improvement Benefits 2 The Impact of Change Orders Identify Change Issue Notification Review Impact Estimate Cost Prepare Change Order Approve Change Order Distribute Change Order Design Work Schedule Work Approve Drawings Order Material Material Lead Time Installation 24 Days Total Time Interfering Time © 2014 FMI Corporation 14 Days 4 Days Change Order Management (1 of 2) • Huge profit leak for most contractors • You rarely get paid for the true costs of a change • Great change order management begins in Pre-Job Planning • Negotiate change order limits Establish dollar limits for unresolved changes that trigger forced resolution Know the contract Know the scope © 2014 FMI Corporation Change Order Management (2 of 2) • When do you have the most leverage to negotiate a fair resolution? • Documentation is critical • If you are adding changes quicker than you are resolving them...you are headed for a problem • Quantifying the cumulative impact of change orders is difficult...but doable • Make the first change a credit • Track costs incurred on unapproved changes © 2014 FMI Corporation Profit (or Revenue) At Risk Example • Customer Focused Construction Co. nets 3% profit On a recent project, CFC failed to collect a $45,000 CO representing $43,650 in cost and $1,350 in profit CO was “let go” – the owner was repeat customer To recover only the cost of the CO the CFC company must win, complete and collect on a… $1.5m job! • What is not considered in this example? The time value of money Should we view this on the basis of net or gross? That is, do change orders have overhead implications? Cash flow, bonding capacity, financial reporting What about the foregone profit? © 2014 FMI Corporation Steps to Successful Change Order Management • • • • • A Process is Essential (The XYZ Way) The Right Tools Alignment with The Firm’s Strategy Accounting for ALL the Costs Proactive in Nature © 2014 FMI Corporation The Process Questions for the Firm: •Does everyone use the same form? •Who defines the level of risk you take? •How proactive is your process? •Speaking of process, what is it? © 2014 FMI Corporation Frequently Overlooked Change Order Costs • • • • • • • • • • • © 2014 FMI Corporation Additional time Consumable supplies Small tools Clean up As-built drawings Bond Project management time Overtime General conditions Lost productivity Drawings Records Additional • • • • • • • • • • • Project insurance Material handling Safety Transportation expenses Warranty reserve Cost of money Mobilization/ demobilization Engineering Estimating Pickup and delivery Per diem Alignment With the Firm’s Strategy • Misalignment breeds frustration – Mixed messages • Lack of consistency Misalignment Examples • Aggressive Change Order “Policy” but “Customer-centric” Philosophy • Loose cash collection process with risk-prone customers • Detailed projects and/or customers with no control systems • Sophisticated systems with no training/education © 2014 FMI Corporation 4 Guardrails for Management • Change order management Allowable CO dollar exposure Allowable number of outstanding Cos • Document control Submittals outstanding Timeline and goals © 2014 FMI Corporation • Schedule development Key activities WBS guidelines • Customer management Pre-construction expectations Performance criteria 5 Proactive Focus “If we wait until the end of the project to solve our problems, the pot of money is gone, and you end up in it.” © 2014 FMI Corporation 7 Proactive Focus High Moderate Opportunity for cost savings Low Pre-Construction Award © 2014 FMI Corporation Mobilization Post-Construction Demobilization 8 Proactive Focus Identification of ALL Change Orders in First 20% of the Project Quick Decisions, Quick Resolutions Exit Strategy – At 80% Complete, Address ALL Closeout Items Solutions NOT Problems All Submittals APPROVED in First 15% of the Project © 2014 FMI Corporation Develop Customized Customer Management Plan 10 Metrics “That which is measured is taken seriously.” © 2014 FMI Corporation 11 Change Orders – Are They Bad for Our Business? • Change Orders are inevitable but not necessarily bad • Strategies to maximize the benefit of changes and minimize the number of claims or their effects on a project: Build creditability: critical to maintain a good working relationship with all parties Get ahead by getting ahead: the sooner the work is done, the better, usually Document, document, document! Work to mitigate the problem A claim is always a last resort © 2014 FMI Corporation Change Order Process – Summary • If the field manager does not know the scope, they will not recognize a change • Documentation and notification is critical • Time is not on your side! • People tend to delay the things they like to do least and avoid conflict • Remember … update “budgeted costs” and “budgeted hours” as changes occur • Know your style of negotiating and your opponents’ style as well. Use that information to your advantage © 2014 FMI Corporation Change Order Pricing Strategy • • • • • • Establish a precedent on the first Change Order Try to make the first Change Order a small one Develop a standard Change Order pricing list Preprint it on your Change Order Request forms Set up a computerized system If the Change Order adds work or slows production, insist on additional time © 2014 FMI Corporation Discussions, Questions, Answers Ethan is a principal at FMI, management consultants and investment bankers for the construction industry. Ethan has worked with both general and selfperforming contractors helping them to develop a strong understanding of the financial risks and rewards inherent to operational issues. Ethan assists these contractors to maximize productivity and minimize risk by implementing proactive management processes. Prior to joining FMI, Ethan spent many years working his way up the construction ranks and held jobs as a Carpenter, Superintendent and Project Manager. During this time, Ethan personally managed projects ranging from minor remodels to multi-million dollar development projects. As a prior service United States Marine, Ethan gained heavy equipment operations experience and is a veteran of Operation Iraqi Freedom. Ethan’s trade knowledge and management experience help to identify problems and offer meaningful solutions. Ethan Cowles, PMP, CCA, GMB Principal FMI Corporation 210 University Boulevard, Suite Ethan has earned a master’s degree in business administration from The 800 Johnson Graduate School of Management at Cornell University and a master’s Denver, CO 80206 degree in business administration from Queen’s University. He is an alumnus Tel: 303.398.7276 of the University of Washington where he graduated with a bachelor’s degree Fax: 303.398.7291 in business administration and earned a certificate in construction E-mail: [email protected] management. He also earned the Project Management Professional (PMP), Website: www.fminet.com Certified Construction Auditor (CCA) and the Graduate Master Builder (GMB) designations. © 2014 FMI Corporation ABOUT FMI Founded in 1953 by Dr. Emol A. Fails, FMI provides management consulting and investment banking for the worldwide construction industry. FMI delivers innovative, customized solutions to contractors; construction materials producers; manufacturers and suppliers of building materials and construction equipment; facility owners, managers and developers; engineers and architects; surety companies; and industry trade associations. FMI’s experienced professionals assist businesses with strategic planning, leader and organizational development, business development, research, mergers and acquisitions, peer groups, private equity placement, project execution, and training. © 2014 FMI Corporation
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