Blocking and Tackling. It’s football season, so a discussion of fundamentals essential to successful performance is worth having. Sound fundamentals are equally important in football and in business. The fundamentals of performance and management are vital to success, but because they tend to be basic, they can often be overlooked to one’s detriment. In football, players know the fundamentals of tackling (we know this because we see them do it on the field), but too often they forego that tackle for a big, shoulder-first hit that fails to bring down the ball carrier but would have made Sports Center had the runner gone down. Ignoring the fundamentals leads to opponents’ touchdowns in football and the erosion of profits in construction.
So how does this discussion specifically relate to construction? Change orders are both unique to and inherent in the construction industry. Our contracts have provisions in them allowing for easy modification and changes. No other industry creates contracts with the specific intent that the terms will be altered before completed performance. In that sense, changes are fundamental to the industry. The manner in which contractors document changes and protect profit margins is the blocking and tackling of construction.
In today’s construction market, contractors are being asked to do more with less and continue to feel pressure to maintain thin margins as a result of strong competition for work. When working on complex projects with thin margins, changed work presents a significant risk of profit erosion. In addition to requiring a scope modification, a change may impact subsequent activities, time, equipment, and site resources. These impacts, the failure to anticipate their effect on a job, and the failure to capture all costs associated with a change can erode profit and turn a profitable project into a money loser.
Project personnel should be reminded to use care and diligence in recognizing changed conditions. Also, keep in mind that a change may not be limited to a scope modification or performance of extra work. For example, a civil project involving significant amounts of concrete placement typically involves an organized series of inspections before and after pours. A change can occur to the inspection process. If these quality control measures are modified by change order, the pricing for this change needs to take into account the additional time, overhead, impact on rebar and concrete subs, and subsequent activities. Failure to anticipate and include these costs can erode profit.
Modifying this example can provide an illustration of how a constructive change can be equally devastating on profit. Assume that the inspection and quality control process is not formally changed, but the specification sections outlining the inspection process are not followed, a constructive change could occur. If the inspection process goes off the rails, the impacts from this constructive change can be severe. Each work activity can require additional work and time. If this changed condition is not recognized, the ultimate impact could be a complete erosion of profits.
When changes occur, proper documentation is essential to capturing potentially lost profit. In the case of a constructive change or a directed change, a fully negotiated, written change order may not exist. When a contractor is required to perform changed work without a negotiated price, carefully complied cost records and detailed daily reports and correspondence addressing the changed work will allow the contractor to approach the owner and receive compensation for the changed work.
In addition to the above issues that can erode profit, the core contract terms may also contain obstacles to allowable changes or recovery that can also affect the bottom line. Building on the above example–let’s assume that the contract has a 10-day notice requirement for any condition or event that might necessitate a change. This language could be either a covenant or a condition precedent. If written in a way that says the contractor shall give notice not later than 10 days from the start of an event, then the language is a covenant or a promise to do so. But, if written in a way that is says the contractor must give notice or it waives its rights to any change or claim, then the language becomes a condition precedent in that notice must be given or the contractor cannot recover funds. Depending on contract terms, failure to immediately recognize the changed condition could be extremely detrimental to the contractor’s profitability.
Other contractual terms may limit the amount of profit and overhead a contractor may receive on any individual change. If performance of a change will necessitate additional jobsite overhead, then that must be priced as a direct cost when working with a contract that limits overhead or the ability to make a profit on that changed work may be impaired. Waivers of delay damages and consequential damages can also adversely impact a contractor’s ability to recovery costs when conditions change as discussed in the example above or similar situations.
Even contractors with exceptional estimators who are highly skilled at pricing work for change requests can find themselves losing money due to unanticipated impacts and changed conditions on a project. Contractors who remain cognizant of the need to anticipate and evaluate the impact from changed work can account for or include those costs into the pricing for changes. This awareness will protect profits and ensure changes can be dealt with successfully.
This article was initially published in the November 2013 issue of Texas Contractor Magazine.