Roland Schopper’s 10-point plan to keep costs under control when things change on site.
I’ve worked with dozens of construction companies over the years on improving their working capital performance. An area of particular focus is always the on-site management of additional work requests and changes to original plans.
Our goal with each client is to put in place processes that ensure there are no disputes at the end of a job that can be used as an excuse to delay the final payment – the payment that often carries most or all of a job’s profit.
Here’s my 10-point plan to achieving exactly this:
1. First day on site you should insist the customer nominates a “notified body” to sign off on changes. As a contractor, you’d prefer this body to be more than one person, while the customer will want it to be a single, quite senior person. This has drawbacks for you because these people are not often on site and are usually less available. An on-site presence is what you should aim for.
2. Push for shorter payment terms for change orders. A well-trained customer will refuse to accept shorter terms but don’t underestimate the strength of your negotiating position here. The original works contract is already signed and urgent delivery reasonably means urgent payment.
3. Always state clearly and as part of the change order agreement if other timelines might be affected. This will require a clause in the original contract referring to change orders and will prevent changes leading to damages claims for delays on the original order.
4. You should be able to produce quotes, with all relevant invoicing data, in days not weeks. Ideally, you will have on site one person qualified to quote costs there and then. I’ve never met one of these very clever people so the best you’re likely to achieve is one person on site and one in office to handle this between them.
5. Further to my last point, provide on-site staff with the training and materials (checklists, quote forms, calculation models) required to speed-up estimating the costs of change orders (including office overheads, design, blueprinting, costs arising from delay of other works, material handling, double work, additional risk etc). Be sensitive to the fact this is not what they were originally trained for or why they chose to work in construction. Help them feel responsible and train them on the tasks required to take over this responsibility.
6. To achieve quicker payment, introduce an on-site sign-off step that sees the “notified body” on the customer side confirm that a change order has been fulfilled outside of the regular monthly processes.
7. Material ordering processes must be easily adhered so as to encourage process discipline. So often we see material for urgent additional contracts ordered outside of the proper process and then delivered without a new project code. Eventually the material is booked to the original contract’s project code, but the contract might feature a lump sum material cost agreement, meaning the additional material does not show up to be invoiced at any later point. In accounting/controlling this looks like a normal cost overrun in one of the material positions and it’s then impossible to separate these wrong positions.
8. Incentivise staff to stick to processes that mean change orders are paid promptly and in full. This could be money – change orders often carry a higher margin – but it could be additional holiday or other perks. If it improves cash flow then it is worth the investment.
9. Proactively manage staffing. Additional work means additional resources or more time for the same resources, which will impact on the overall project’s profitability.
10. Ensure daily recording of time and material that goes toward contracted activity to reveal any not-yet-contracted work. This creates visibility into things such as maverick buying or putting materials elsewhere on the site. If recorded correctly you have a chance to compare planned activity against what’s actually happening and find out early if something is going wrong.
Compared to many client industries that REL works in, withholding payment of an invoice based on claiming a dispute is a particular problem in the construction industry. But if your house is in order with most or all of the above points, you will be in a strong position to quash disputes quickly and get paid promptly.
Roland Schopper is senior manager, Europe, at REL Consultancy
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