We asked our lead instructor Sid this question and here was his response:
How do you not let change orders eat away at your profit? Well, there should be ... If there were the 10 commandments of what to do to run a business that would probably be in the top 3, change orders.
The very first thing you can do by not allowing change orders to eat away at your profit is to do doggone change orders.
There are many contractors out there who are doing work because the customer wants something changed or the architect wants something changed and then they don't think about being compensated for that. Sometimes it's a minor change but sometimes it could be a major change and we don't want to do ...First of all, we have a contract to build something.
We have to build that project according to the contract.
If there's going to be a change in the scope of work, then the law requires that change to be in writing and everybody agree to what that change is going to be.
One of the ways we can do this, and it's #1, by actually having blank change orders on the job site so that they can be signed for and paid for at the time that the change is actually made.
Now, what generates a change order?
Well, that's normally done by the owner or the architect by doing an addendum. Some people ask, "Well, what's an addendum?" An addendum is an official request for changing the original plan to something else and then doing a drawing with specifications that indicate how that's to be done. Once you receive the drawing and the specs, now you can put a value to what that change order is going to actually cost, and many times it means additional costs that are going to the homeowner.
That change order is really a legal document. In fact, you're legally bound to do the scope of work. If there is a change order, then there needs to be a written change order to change that scope of work so you are legally right in doing that. Therefore, by having change orders on the job site that you can implement right away and then get paid for them right away not only keeps the job going but keeps the customer happy in the process.
You have to remember that sometimes some of these homeowners believe that they're paying you so much money why do you have to charge extra for little changes that may only cost a couple hundred dollars. Well, those couple hundred dollars are coming out of your profit end of the job when it's done.
We basically want that change order to be signed and paid for, and paid for at the time of signing the change order.
The beauty of that is that your contract price doesn't change. Your final agreed contract price doesn't change, you get compensated for any additional work by change orders and so it makes the paperwork and the paper trail a whole lot easier to understand.
How do you get a blank copy of a change order?
Yeah, that was a problem years ago but if you go online now and just type in change orders there's a whole selection. There's dozens of them online that you can choose from and they're all quite good. I've looked at a lot of them and in our class the students actually get a blank change order so they can actually use that in the field.
What if you have a situation where a customer doesn't want to pay for a change order? How do you handle that?
Okay. Well, the contract is legally binding on both parties so here's the beauty of it all. If the customer ... First of all, you should have in your contract how change orders are to be handled in the contract document. In our contract it says change orders must be agreed to and signed by both parties and paid for by the owner.
Now, if the owner doesn't want to pay for it then you don't have to do the work. You really legally are not bound to do a change order. The homeowner can hire another subcontractor to do the change order if they want to, and that very rarely does that happen. If they don't want to pay for the change order, then you just continue going on according to your contract documents.