As an Owner, I often deal with vendors submitting change orders for a potential change in scope. My initial reaction is ‘how much attention to detail will this proposal receive’? Simply put, subsequent to pricing development, will the team provide a fair and reasonable review of this change order before it is handed in for an endorsement?
Historically, unless you have a seasoned representative that understands the importance of fiduciary duties, the Owner’s specific interests and concerns, and the confidence to push back and challenge the entity’s pricing adjustment, the change order will not receive the proper level of scrutiny, especially because many of these representatives reviewing change order requests are junior in their careers.
For the most part, a representative’s decision to move forward with a change order request is decided more on ‘gut instinct’ vs. proven analytics. As a result, this change order packet ends up on the Owner’s desk with a request for an endorsement. Any Owner worth his/her ‘salt’ will scrutinize this order until he reaches a comfort level that the review process done prior was adequate.
For ease of illustration, the following two real-world examples are less complex and minimal value change proposal submissions. If the standard of care is lacking in these particular scenarios, then imagine the negative impact that this could have on much larger-scale change proposal submissions.
Scenario: End of project, last minute changes. Team working under duress to finish base scope of work with a strong team comfort level between the contracted Owner's Rep. ("Rep") and the Construction Manager ("CM"). Pricing was submitted no less than 3 times from trade contractor to the Owner.
The Change: Owner directed – add a 12” wide horizontal accent stripe on a white wall. Wall length is ~75’ total, 4-feet off the floor in an elevator lobby. Task to occur on 10-floors total. Accent color used elsewhere on floors.
Pricing #1 submitted to CM, only: >$60K. Result: CM sent back to trade contractor for revisit; thought it was overpriced.
Pricing #2 submitted to CM then to the Owner's Rep then to Owner for endorsement: Included 400 hours of installation time plus material for 1 person at a revised value of $31K.
Let’s pause here.
>$60K, 1st round to ~$30K, 2nd round. This is an indicator. If the scope didn’t change and the pricing dropped in half, then it begs a few questions:
1. Just how inflated is this proposal?
2. Why is it inflated? Is the contractor attempting to recoup loss of profits during the project in this change order?
3. Are the reviewers asking themselves these questions? If not, why not?
Result: Owner sent back to Rep for the CM to revisit. Simply did not believe the price was justifiable, and the reasons why are:
1. Owner broke the labor to simple metrics. Hours divided by floor. 400 hours / 10 floors = 40 hours to paint one (1) - 12” horizontal stripe 75-feet in length, or 1 work week per floor, or 10 weeks total for 1 painter.
2. Then asked himself a question: "Does this make sense?" Is it plausible to see 1 person spending an entire work week painting one (1) – 12” wide stripe for 75-feet? And requiring 10-weeks to complete the entire project? The answer was “no.” It didn’t make sense.
Pricing #3 – price reduced to $21K submitted to Owner. Also rejected and sent back. The metrics still did not prove out.
Example #1 Conclusion: Proceeded on 'time and material'. CM submitted tickets for $11K worth of work with tickets signed by CM Superintendent, average time 11 hours per floor. Result: Owner did not agree.
Reason: Owner witnessed painter setting up to do the work and stayed with him for 1 floor, and had video of the painter on security camera to support.
Actual time and value spent: 3 hours per floor for installation + ½ hour for staging. Final value ~$4K. Differential for Pricing #2 to final agreement: reduction of ~360 hours and $27K, just because one metric was questioned.
1. Engineer for the Construction Manager did not have adequate experience in determining scope of work and relevant questions to determine such. Also, he/she thought he did a good job getting the 1st submission reduced.
2. Owner’s Rep and lead Project Manager for Construction Manager were not reviewing the change order and ‘rubber stamped’ it along, based on comfort previous reviewers did an adequate review.
Scenario: Beginning of project, need to advance work to start schedule (Preface: this example based on setting a precedent rather than final cost).
Change: Field condition. Knee-wall installation at perimeter of floor needs an extra clip for shelf loading support. Approximate 300-clips to attach to the framing in a repetitive manner. The framing is scheduled to be installed.
Pricing #1 submitted to Owner for endorsement: 48-hour of install time (2 mechanics, 3 days), 16-hours of foreman time, 8-hours of labor time. 3 cartons of clips and 1 box of fasteners.
Result: Owner almost signed it, but then didn’t and sent it back, even for the nominal value, for the following "Does this make sense?”
1. Mechanics time – 2 mechanics, 3 days, total 48 hours. 300 clips / 48 hours = 6 clips per hour, or 10 minutes per clip. The work will be done integral with the framing. Is it really 10 minutes to install one clip with 4 fasteners? Unlikely.
2. Labor, 8 hours: Trade contractor already owns their cleanup, how much more time was 4 boxes and the sweeping going to add to cleanup. The cleanup wasn’t going to be done separately of other cleanup. Is their labor time? Sure, but is it a full workday? Is it even half a workday? Realistically, it’s probably very minimal.
3. Foreman, 16 hours: The foreman is already on site a full work week. The contractor isn’t asking a schedule extension nor overtime, nor asking for a separate foreman to oversee this. Is there foreman time? Sure, but is it a full two days to oversee a clip being installed? Realistically it probably isn’t more than a ½ hour to instruct and ½ hour to inspect.
Example #2 Conclusion: Pricing was sent back to CM. Owner believes this is more attributable to ‘material only’ cost than labor. The CM and Trade Contractor disagree and believe the hours submitted are fair. Therefore they prefer to complete the work via 'time and material'. So, the Owner’s Rep will be on-site to witness the time it takes to do this work. It’s petty, but it’s ‘table setting’ an expectation on the level of care of the pricing submission.
1. For CM and Reps there is a fiduciary duty to represent the client’s interests fairly. The Owner will eventually be challenged by their supervisor and/or the company’s audit team.
2. Owners understand that lump sum pricing will include hedging of risk by the trade contractor. However, the hedge needs to be fair, reasonable and not excessive.
3. Passing through pricing without critical review: 1) Is not the value added service that’s expected by the client; 2) Creates liabilities for many different entities to attempt to justify later; and 3) Creates rework and frustration for many people to continually revisit pricing.
4. Reputation and Perception Management is damaged. Once this happens loss of confidence follows for any subsequent pricing submissions. The credibility is tainted.
What to be mindful of:
1. Training junior engineers and managers appropriately. The review workflow starts with them. Teach them what they should look for and ask when reviewing change order pricing. “Does this make sense?”
2. All partnerships are meant to create value. No vendor wants to complete a ‘mediocre’ job for their client, but 'pass through' pricing does create a negative impression and negates all the positive work vendors do perform.
3. Before the pricing lands on the desk of the Owner, be certain that you are confident in the submission and you can stand behind the value.
4. Exercise a standard of care that you would to any other activity within your work realm. It minimizes the potential for loss of confidence and frustration, and it increases the productivity of your team.
Having recently had the pleasure to participate on industry panels and later engaging in conversations with potential external partners, many discussions meander to a similar topic: Owner expectations in project management (i.e. ‘Standard of Care’ or ‘SOC’).
Considering the great relevance of this topic and with years of lessons learned, I truly believe that significant value can be derived from composing and sharing a series of articles. I hope that sharing this knowledge can benefit others in the industry.
Defining Standard of Care
A legal term, Standard of Care can be expressed as a set of expectations delivered in accordance with the best practices of the respective industry. Quite simply, an organization selling subject matter expertise is expected to provide the utmost care and delivery in accordance with their industry’s practices.
Standard of Care can consist of a formal set of practices defined in an industry’s best practices, or it can be informal and unwritten, based on an industry professional’s past experiences.
Either way, incorporating a Standard of Care and the expertise into every project is providing a value-added service essential to project success. Such expertise, as defined in the Project Management Institutes' 10 Knowledge Areas; www.pmi.org , includes the following:
Standard of Care – Why is it important
The downstream effects a project has doesn’t live at the project level alone nor just at the end of the project. The continual outputs over the life cycle feeds into the organization’s overall business processes; albeit with: Accounting, Sourcing, Treasury, Financial Planning, Investor Relations, IT, Security, etc. Each of these business units are a project stakeholder as they have interests being represented. These interests, Enterprise Environmental Factors, (EEF, www.pmi.org ) are drivers into how the project is managed and the overall care that should be facilitated.
The implementation of a strong Standard of Care is essential for the following reasons:
Gap Analysis and Alignment
It is essential that external partners understand the level and types of care the Owner is seeking, even if it is not implicitly stated in the agreement. They should understand how the project dovetails into business operations with the respective EEFs. It is prudent to align those expectations against their intended plan and perform a gap analysis to achieve resolution on project deliverables.
What is the End Goal?
Ultimately, the goal is to execute a thorough, comprehensive level of care that delivers the product while demonstrating controls and metrics that align with enterprise factors. In the project planning process, the management team must be aware of those ‘hot button’ items with the Owner and incorporate these factors into their strategy and delivery, and more importantly how these factors will be managed and delivered – to what level of tolerance and care.
I recently attended an Owner’s Conference for those who contract capital work. Between the general sessions and the breakout forums, safety was a topic often discussed. Presenters (owners and vendors) demonstrating their laser focus care on safety and touting their successes. However, there was a common thread I noticed among the discussions: the apparent definition of ‘success’ was attributed largely, if not only, to Lagging Indicators.
Lagging Indicators are accident/incident rates of low values; such as:
The indicators are "lagging" because they are relying on the passage time to determine the metric and success. The lower the rate, the greater the success, as it was presented.
While minimal values are positive (lagging) indicators of a safety program’s success; when used alone they are not sound indicators. Used alone these indicators can easily be construed as ‘false positives.’ The reason is the Lagging Indicators are only examining results, they are not examining the actions or the approach to safety as work in occurring.
To substantiate a safety program’s success, Lagging Indicators need be complemented with strong Leading Indicators.
Leading Indicators are proactive studies that adherence to safety is the culture. The studies validate that mechanics in the field are applying the level of care to working safely and thus is a large contributor to why the incident rates are low.
Leading Indicators, such as:
One could reasonably argue a project may be largely successful due to being ‘fortunate’ vs employing a sound program.
Many years ago, as a CM, I served on a project where the Owner rewarded the trades when no accidents occurred over a two-week window. This reward perplexed me; because it rewarded folks for not getting hurt, even though the opportunities for people to get hurt, daily, was plentiful. The intent of the reward was to recognize a positive attitude to safety. While there may have been minimal accidents on the project, it wasn’t due to a positive attitude being employed. The project was just lucky.
Only with the balance of both Leading and Lagging Indicators can an articulate conclusion be rendered if the safety program is successful.
Why you may want to know your clients’ agile expectations.
The client is more agile, their business is being agile, they live in a technological driven agile world. But what is Agile?
I can cite the Webster’s definition of Agile. But what is it to the client? What does the word mean to them? It’s similar to asking the client to define “success” in gathering their expectation level. But the expectation of agile delivery, does our industry have it?
Our agile clients, they live with the mindset of being flexible and nimble. Being able to pivot on a dime. Then they ask us to build out their new creative sandboxes.
We then proceed to meander down this quagmire of a methodology that doesn’t pivot on a town. This linear, rigid, sequential and unforgiving process that increases the stock of Motrin, Advil, and Tylonel – mostly for our clients. A process where speed-to-market is the turtle in the race with the hare and the hare is our client. A process that if a latent change occurs by our “audible calling” clients, disruption to plan is most likely not minimal.
Our industry has gotten leaner and we have reduced waste, but we are we more agile? We still employ essentially the same process as we have been doing for decades just with less waste.
We are being asked to deliver Agile Spaces for Agile Clients via non-Agile Methods, for clients whose sole purpose is to challenge the status quo. For clients who don’t understand our process and believe that imposing a change is as simple as running to Home Depot or Lowe’s, getting the product and slapping it in. That’s their knowledge base.
It’s inevitable, but our dogmatic process and it’s speed to market is going to be challenged by our clients. That’s who they are and what they do. They will think the process can do it faster, with less headaches and will force change in the industry; and maybe do the work themselves.
We need to be ahead of that, not behind it.
We are looking for help again with another survey we are conducting for Technology in The Built Environment.
We are looking for industry professionals - GC/CMs, Subcontractors, A&E, Owner's and their Reps to participate in a quick survey about types of technology to advance in the industry.
Please click here for the survey www.surveymonkey.com/r/BGGBHPV
Thank you in advance!
We're conducting a research paper on the training and development of Young Professionals in the Design and Construction industry, and we are looking for survey takers on the following surveys.
Please only take the survey that applies to you in the industry, so as not to disrupt the results.
1. Young Professionals (7 years or less in the industry) of A&E, CM/GC, or Owner's (Reps) firms please click here..
2. Owners (1st party) of Capital and Construction projects please click here...
3. Management of A&E, CM/GC, or 3rd Party Representation service providers firms please Owners (1st party) of Capital and Construction projects please click here...
All surveys are through SurveyMonkey.com and should take about 5 minutes to complete, no more than 10 questions.