Who Should Pay for All Those Change Orders?

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Who Should Pay for All Those Change Orders?In Part 1 of this series, Project Change Orders – Manage Them or Just Make Them?, we discussed how project change orders are inevitable.

We concluded that mature project management is about change control, and managing all those changes as they occur.

This is important, because change orders will almost always change the cost of the project, which is distinct from the price.

 

Remember:

Cost is a project management function; price is a sales and business function.

 

So, who should pay for all those change orders?

Can you get the customer to pay for them, or do you have to absorb all those costs?

Part of the Project Manager’s responsibilities should include documenting change orders as they occur.

 

Project management is about managing changes as they occur — not just making changes.

We have talked about the best practice of making Field Change Order forms readily available on the job site. Project Managers must have the authority to fill out the Field Change Order form, and get it initialed by the client.

A number of Field Change Orders (typically five to 10) may be combined into a single Contract Change Order.

The Contract Change Order process is managed by a combination of the project manager, sales representative, and procurement specialist, depending on their specific roles and responsibilities in the AV integration company. A Contract Change Order details a total number of hours (plus or minus), changes to equipment and associated parts/materials, the labor to modify the drawings (this is often left out), and any travel related charges.

Based upon the AV integration company’s management and sales conversations, a client may not be billed for all of the work required to fulfill the Field Change Orders. Again, this is a business management decision, but you should always list the Field Change Orders’ impact on a project in its entirety.

 

“I’ve found that clients will understand and respect you more when you show them the effort and materials required to make the inevitable project changes, then show them that you will not be charging them for a portion of that effort (you may even decide to credit the client when a change causes a reduction in the total labor required for the project).” Brad Malone

 

I’m not saying give away the store, but it’s amazing how a client’s perception of value and professionalism changes when you share factual information.

Overall, this change control process communicates to the client that the project was well managed, the project manager actually had a change control process in place, and your company values the business relationship it has with the client.

Unfortunately, this is very different from what I normally see.

Too often:

  • The client requests a change, or the facility doesn’t match the drawing, or other subcontractors don’t complete their portion of the job.
  • There is no easy-to-use change-control process for the project manager or lead technician to follow and document.
  • Sales doesn’t find any value (monetarily, for themselves) in processing small (or sometimes even large) changes.
  • And the client (sometimes the general contractor) ends up learning that the AV integration company will make changes without any ramifications in price to the client.

This common scenario reduces profit potential, increases labor costs, and causes frustration across the installation and service departments because they feel that the extra labor required to fulfill the change was not valued.

Because changes weren’t tracked, the final drawings don’t match reality, there’s no closed loop to correlate the variance between actual and estimated labor, and future estimates continue to be off.

Successful change control is a conversation about organizational maturity. It starts at the top of the organization and permeates outward.

Successful change control begins with the shared belief that we manage a project as it changes instead of falsely making a project match the plan.

Mature integrators deal in reality and reward truth. Project management is about managing changes as they occur — not just making changes.

 

By Brad Malone, Managing Partner at Navigate Management Consulting