Sunday, August 8, 2010

Change Orders: Get Paid for Extra Work

Has there ever been a construction project that didn’t require at least one change?

A contractor can go an entire career without seeing a job like that. And for good reason. Construction is too permanent and too expensive to resist making a change when the need is obvious. Take this as carved in granite: Changes are endemic to construction. That’s not going to change. Accept it. Welcome it! Changes should be a profit center for construction contractors. I’ll offer seven rules designed to make that happen.

Rule One: Every change requires an order.
This should be obvious. Don’t agree to any change without a written change order. Some states require it. Many construction contracts void oral agreements to make a change. Get it in writing.

Rule Two: Changes get done at your price.
On government and big commercial jobs, contracts often require that changes be done on a cost-plus basis –- usually cost plus a few percent. If you draft the contract, don’t let that happen. Make it clear in the agreement: Changes are your option, at your price and on your time schedule.

Rule Three: Surprises aren’t your problem.
When you discover something unexpected -- a defect in the plans, something about the site, an emergency, a mistake by the owner, etc. -- it’s not your responsibility. Contractors aren’t insurance companies. A surprise that requires extra work is a contract change and requires a change order. A good contract will identify types of surprises that constitute extra work. When a surprise happens, just point to the contract clause that covers the situation. Case closed. You win.

Rule Four: Changes required by law are extra work.
Contractors have to follow the building code. But any change in the job required to conform the work to existing or future laws, ordinances or regulations is extra work. Your contract should make that clear.

Rule Five: A dispute over extra work does not delay payment for other work.
Payments are due as scheduled for work not in dispute. That removes the incentive to haggle over extra work and simply makes sense.

Rule Six: Collect in full for extra work when that work is done.
Don’t wait until project close-out to collect for extra work. When extra work is 100% done, you’re entitled to 100% payment for that work. Put that in the contract.

Rule Seven: Attach a sample change order form to your contracts.
California already requires this in home improvement contracts. California Business and Professions Code § 7159(c)(5). Having a change order form handy simplifies and organizes making changes. It also puts the owner on notice: You’re going to charge extra for extra work. That helps head off problems.

If you’re using Construction Contract Writer, you’ll find all seven of these options offered in every contract-drafting interview. If you’re not using CCW, have a look at the free trial download.