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.