Watch Out for the High Price of Change Orders

One of the most important parts of managing a construction project is keeping costs under control. Many a project throughout the years has gone over budget, always causing problems, sometimes disastrous ones. Whether you are building your home, or a skyscraper, you can pretty much count on unforeseen costs, which drive the total project price higher.

Let me tell you a secret here about contractors; many of them depend upon those extra costs to stay alive. When they bid the project, they are competing with other contractors. To win, they have to be the one who comes in with the best price, while still promising to meet all the specifications laid out in the plans and specs. That means providing a low-ball price, with minimal profits.

Once the contract is signed and the job has been started, the contractor has a captive audience. They no longer have to worry about beating other contractors to gain the contract; they already have it. So, many will provide a price for those changes that’s a bit inflated, to say the least. They are depending upon those changes to make their profits. This is where it can get dangerous for you as the property owner.

There are three causes for changes on a project:

  • Something was left out of the plans. While architects strive to prevent this happening, they aren’t perfect either, it does happen once in a while.
  • An unforeseen problem shows up in construction. This can be anything from adverse weather causing problems, to massive undiscovered rock formations getting in the way of putting in your foundation. The contractor isn’t responsible for them, because they’re not his fault.
  • You, as the owner, request a change. That’s under your control, so realize that when you do request a change, the contractor is going to try and take advantage of it.

Whereas the original contract will probably have been bid with a profit margin for the contractor or ten percent or less, these changes may be priced with as much as 30 percent profits or even more. While he may see that as an opportunity to make up his profits, it’s fundamentally unfair to you as the owner.

So, how do you control those costs? It actually takes a combination of things to do so. But, by following these items, you can reduce your risk:

  • Don’t ask for unnecessary changes. If something would be overly expensive to change later, have it done, but if you don’t need it changed, try and avoid giving the contractor that opportunity.
  • Ask the contractor to give all change orders with a breakdown: so much for materials, so much for labor, so much for overhead and so much for profits. He might still lie, but he’ll have to work harder at it.
  • Verify prices yourself. If he says that the bigger hot water heater is going to cost an extra $500 to buy, go to Lowe’s and check for yourself. If his costs don’t seem reasonable, ask him to back them up.
  • If you receive a large change order request, such as finding a large outcropping during excavation, which is going to require blasting; get a second opinion. Even if you have to pay another contractor a $100 consulting fee to give you an idea of what that should cost, it can save you money in the long run.

You have to realize that the contractor isn’t your friend. Hopefully, you’ll be able to develop a friendly relationship with him, but that’s not the same as being a friend. You are a customer, the source of his income. Therefore, he needs to get your money.

This problem is one of the biggest reasons why first time homebuilders will hire a construction manager. Even with paying the manager’s fees, the overall project cost can still come out lower than it would be if you managed the project yourself. Everyone else that works for you on the project is there to make money; the project manager is there to be your advocate. His knowledge becomes your protection.

 

© 2012, RCartright. All rights reserved.

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