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?
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© 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!
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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
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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
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© 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
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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
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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
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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