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We’re going to start a series called Marginal Margins, calling your attention to some very specific issues that we know can eat away at your profit margins.

The first one naturally follows last week’s newsletter on Change Work Orders. Last week we discussed the importance of having signed Change Work Orders (or Additional Work Orders). Today we’ll discuss four of the mistakes that are often made when writing those Change Work Orders.

1. Pricing. When you price a Change Work Order, your markup on that change needs to be a minimum of 10-15 points higher than your standard markup. CWO’s take up lots of your time, other people’s time and they slow the job down. It’s appropriate to charge more for CWOs because those slowdowns increase your overhead expense for that time period.

Now – I don’t approve of deliberately setting yourself up for Change Work Orders so you can gouge your client. Those are the contractors who bid a job low by quoting substandard materials, or who conveniently forget to include windows in a room addition. They make up for the low price by adding on changes and charging outrageous prices for those changes. That’s dishonest, unethical, and a few other bad words.

I’m talking about actual changes requested by the client. When they change their mind and want two windows instead of one, or want the fireplace on the other wall, you need to back up and rethink the job and your schedule. These are changes that you don’t see coming, and it’s appropriate to charge more for them.

2. Payment. Change Work Orders can change your payment schedule, so this needs to be addressed upfront. In my opinion, any change that costs less than $2,500 should be paid in full upfront. If it is over $2,500, get two payments: one at the signing of the CWO and the other at the next scheduled progress payment. If the change comes between the last progress payment and the final payment on the job, the entire change order should be paid upfront, period. No pay, no change.

3. Show All Three Prices. When you write the Change Work Order, it’s important to list these three numbers clearly on the document: the price of the change, the previous contract amount, and the new contract amount.

Change Work Order #1
Change the original contract amount by: $2,654.00
Previous contract amount: $31,297.50
Revised contract amount: $33,951.50

With these three numbers, your client can clearly see what the price of the change is, and how it affects the total price on the job. If you write a second change work order on this same job, it would read like this:

Change Work Order #2
Change the original contract amount by: $1,203.00
Previous contract amount: $33,951.50
Revised contract amount: $35,154.50

4. Contract Completion Date. Be sure and extend the contract completion time/date with any CWO that you write. If you think that the change will take you four (4) additional days to complete, then add eight (8) days to the contract completion date. If you think it will add two weeks to the job, then add three weeks to the completion date. Better to under promise and over deliver than guess wrong and incur the wrath of a client who is anxious to get a project completed.

Additional work as specified will start on signing of Change Order No. 1 and will extend the contract completion date 8 days from May 30 to June 7, 2013.

Comments From Michael

Business is improving for many around the country, especially those who are advertising and promoting as they should. With more jobs to build comes the need for more manpower. Before you hire anyone, make sure you’ve accounted for their labor cost in your estimates. That way when you put someone on the job, the money is there to pay their hourly wage. Also, look to hire some of our veterans and younger people who are looking for a job. If they have the initiative to come and ask you for work, find a reason to put them to work. Remember, we all started just like they did at one point in time. When you got started, you didn’t have experience and someone hired and trained you. Pass that consideration along. You’ll probably be pleasantly surprised.

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