S1 E17 Handle Change Orders Like a Pro

Season #1 June 02, 2025

Summary

In this episode of the Management Under Construction podcast, Brad Wyant and Dee Davis delve into the complexities of change orders in the construction industry. They discuss the importance of understanding change orders, the psychological factors influencing cost estimations, and the impact of low bidding on project costs. The conversation emphasizes the necessity of building trust between contractors and owners, the significance of accurate documentation, and the challenges posed by design issues. They also explore strategies for effective negotiation and the importance of contingency planning to manage unexpected costs. Throughout the discussion, the hosts share personal anecdotes and insights, providing listeners with practical advice for navigating the often-contentious world of change orders. When you are done with this podcast and implement the wisdom imparted, you will have begun your change order wizard journey. This is the way.

Takeaways

Change orders are a critical aspect of construction management.
Accurate change orders protect the reputation of contractors.
Understanding the psychology behind cost estimations is essential.
Low bidding can lead to higher costs through change orders.
Building trust with owners is crucial for successful change order management.
Contingency planning is necessary to handle unexpected costs.
Time pressures can complicate the change order process.
Strong relationships can facilitate smoother change order negotiations.
Design issues often lead to change orders and must be managed carefully.
Effective communication and documentation are key to successful change orders.

Chapters

00:00 Introduction to Change Orders
01:45 Understanding Change Orders
04:17 The Importance of Documentation
06:41 Psychology of Cost Estimation
09:23 Economic Incentives in Change Orders
11:59 The Role of Marketing in Bidding
14:18 Trust and Relationships in Construction
16:48 Owner's Perspective on Change Orders
19:12 Time Pressure and Change Orders
20:05 Constructability Issues and Design Changes
24:53 The Amnesia Factor in Change Orders
33:28 Design Responsibility and Liability
38:14 Navigating Change Orders and Owner Expectations
39:05 Building Trust and Setting Expectations
47:00 Effective Communication in Change Orders
56:10 Negotiating Change Orders and Fair Pricing

Episode Transcript

Brad Wyant (00:00)
Good morning and welcome to the Management Under Construction podcast. I'm Brad Wyant.

Dee Davis (00:04)
And I'm Dee Davis and we're here today to talk with you about change orders. Everybody's favorite subject. Who doesn't love a change order? they are the bane of our of our industry. Are they not?

Brad Wyant (00:15)
Absolutely. They're one of the things we are most notoriously known for and one of the least favorite subjects on any job site, but also a very important one to get right. So before we jump into what we'd to talk about with change orders and what they mean and how they're dealt with, we're just going to talk about our experiences with them. I didn't really get acquainted with change orders in my career until about three or four years into it. As a young PE, I wasn't allowed to work with costs very much.

I just was asked to get quotes and then somebody more senior than me was asked to deal with them. They're too important to be dealt with by the inexperienced folks. But once I did get acquainted with them and I understood how much fudge there was in them that subcontractors would leave these huge amounts

In their proposals that didn't make any sense and I call them and say hey what's this about I can take that down okay so here's what's going on these people are. Leave leave in some room to negotiate in these in these quotes they're giving us. once I understood that that was the game people were playing it became a lot easier to understand their behavior but do you want to bring us here through your experiences with change orders.

Dee Davis (01:20)
Yeah, well, you know, I completely agree with the strategy of not letting people get too involved in change orders in the first couple of years of their career, because there's so much to them. And really it's a reputation thing in my opinion, whether you're a trade contractor or your general contractor, getting a change order, right. Is really, really important. If you get in there and you are.

quoting scope that isn't even in the change, which I see happen more often than I'd like to see, it damages your reputation. if I'm the one reviewing your change, I'm going to question absolutely everything that you give me because it doesn't appear that you know what you're doing. So getting people that are experienced is super important. I've sat in the GC seat, the owner seat, the trade contractor seat.

anybody that's worked with me, would say, Dee is a Stickler on changes. Yes, she is. Why? Because it's important to get it right. It's important for the owner that they are only paying for what is supposed to be in the change. It's important for the contractor because it helps define your scope for you. it's a scope definition thing. And it's important as a GC to make sure that your folks fully understand the work that's being

changed and that's being priced so that they can properly evaluate the change.

Brad Wyant (02:36)
Well put. So let's jump into what a change order is. I wish I had taken a class in some kind of a construction management course as undergrad on this, but I learned as I went that a change order is a contract document. If it's approved, it's a modification to the terms and conditions that everyone's agreed to and should be viewed that way, not just as some separate new thing, but as a modification of those documents. There are procedural requirements for submitting a change order.

which are usually prescribed in the contract. Those procedures can involve the language used, the length of the change order in terms of the pages of it, the amount of time that has expired since the change was initiated and submitting the change order. There's often a due date associated with it and there are often forms that the contract requires you to use. Although I've almost never seen those forms get used in the real world. Most subcontractors and

have their own forms that they use as opposed to the ones prescribed and no one seems to care. So most of those procedures are followed, but some of them aren't. Usually there's some kind of a financial impact associated with the change order, and sometimes there's a schedule aspect as well that a duration of a specific task is going to get longer. That the schedule end date is going to change that float has been impacted by this in this many days. Float for those.

Unacquainted with the critical path method of scheduling is a term used to describe. How much wiggle room effectively there is to complete a certain task. If you could complete something within any five day window, it only takes two days. You've got three days of float and then if something changes and you have less wiggle room, you're reducing that float That's sort of a broad overview of what a change or is. Do you think I missed anything important there Dee?

Dee Davis (04:18)
if you're on a project and you're looking for where do I go to find out the parameters of a change order on my project, there's two main places where you're going to go look. Number one is your contract. Like Brad mentioned, it may or may not be detailed and specific. Hard to say. It depends on the contract. The other place to go look is division one of the specifications.

So division one, depending on the owner and the designer, oftentimes will outline for you what's acceptable in a change order, sometimes, like you say, the forms, if there's a prescribed timeline and part of the tricky thing that you hit on is some of these things are fiercely enforced and some aren't. And trying to figure out from job to job, owner to owner, project to project,

What's going to be enforced can be a little bit tricky. And so talking to your project team in the beginning and figuring out where are the landmines because there's going to be some. So where are the landmines? Read through your documents. There's really nothing more important I can tell somebody in this industry than read and be familiar with your documents, all of them, all of your specs, all of your plans, all of your contracts.

so that you understand what is the maximum landmine potential for you as a contractor, right? These are the things that are expected of you. Now, some of those may be a little squishier and more negotiable, but some might not be. So you have to go in assuming that all of that is gonna be enforced in its strictest terms, and then you kind of go from there.

Brad Wyant (05:50)
Yeah, reminds me of the movie My Cousin Vinny where Vinny is in court for the second day after having been told off by the judge that he should wear some kind of a suit that be made of some kind of cloth when he comes in his courtroom next and to look lawyerly. And then he comes in again in the same clothes after having been put in jail for contempt and he goes, you were serious about that? That's how some people end up running afoul of the terms.

of their contract and the general requirements and conditions. So that being said, long story short, the best practice is to start off by reading your contract and then by reading your specs. And then finally, by having a conversation with your owner about what procedures they want to follow. Sometimes some owners are going to play it little bit looser. Other times owners are going to play it hard and fast, strict, according to the rules. So get acquainted with the facts and then get acquainted with what your client wants.

Moving on to a little bit more about how change orders have become so contentious. I think this gets around a human nature. There's a great study done about professionals in our industry and our estimating abilities. And when it comes to cost, our nature is to have a guess for cost and then not have any idea how much more expensive something could become than that, but also not have very much clarity on how much less.

expensive it could become. We tend to underestimate the cost of things much more often than we tend to overestimate the cost. We are more optimistic as a species than we need to be necessarily. So what ends up happening, in my opinion at least, is that owners get tunnel vision with the cost of project. Once they see a GMP, guaranteed maximum price, signed for a certain amount, they want it to cost as close to that amount as possible. And they're promising a budget based on that amount to their stakeholders.

Anytime that change order comes in and starts to creep up that cost, they are upset because they don't want more of those to come in and creep up the cost even more. That's not the kind of trend they want. But as any of us that have been in this business know that guaranteed maximum price that people call that type of a contract is more like guaranteed minimum price because design is never complete, because scope gets added, because people want more things on the job, and because things never go better than we expect them to. A little bit of that psychology there.

The markups on change orders, interestingly enough, are most often higher than the original scope work. I've never worked on a job where our fee was more than three and a half percent on the base scope of work, but on change orders, the general contractor is usually eligible for about five percent and the subcontractors are eligible for 15 percent, five percent profit and 10 percent overhead and other general conditions.

Dee Davis (08:30)
More.

More.

Brad Wyant (08:32)
Or more!

Dee Davis (08:32)
Yeah, there's especially in the pharmaceutical marketplace and other specialty type projects, the markup can be quite a bit more than 15 % for a trade contractor. I've seen some ones that I question why owners have agreed to them. They're so high.

Brad Wyant (08:52)
Let's talk about that because I thought about that a lot as well. seems like the contract is structured for there to be an economic incentive for subcontractors to perform change order work to bid low at the beginning of the job and then to change order in whatever scope they chose not to include because they could weasel their way out of it for whatever reason saying, oh, it's not shown on this print, but it is shown on that. That was unclear. So you have to RFI it on all of them. And now I can.

charge you for that thing that was sort of partially shown. What are your thoughts about that?

Dee Davis (09:23)
Well, I would be neglect if I did not mention that graphic that I think everybody in planet Earth has seen where you have the little dingy is the contract and the yacht is the change order, right? everybody's seen that graphic and our industry gets this reputation and contractors get this reputation it's all about the change order. We're going to, everybody's going to low bid and we're going to go for the huge change order.

I'm not saying that I haven't seen that happen, but I'm also saying I feel like the contractors are left with no choice to some extent because there's a couple of different things that happen in the industry. First of all, there's the contract types, depending on what kind of contract type you're going in, if you're doing any kind of public work, that's all low bid

So you know going in, you must be low. And if you're going in bare bones, you got to figure out how to make some money after that. I spent much of my career in the public works industry. it's a skill to learn how to do well in public work and to be honest while you're doing it. Then there's the psychology part of it. I can't tell you how many,

Contractor interviews I've sat in where you'll get three four bids for this massive project Everybody wants to talk about the low bid. Everybody wants to just go right to that like a like a bug to a light there's 10 % difference or there's 5 % difference and 5 % in this world could be a lot It's cheaper. It's cheaper. Let's do it that that urge

as a human being to get a deal. We've talked about this before in other episodes is hard to overcome for any owner in any situation, trying to convince them that what appears to be the good deal in the beginning may not be the best deal at the end. And maybe that contractor that's low bidding in the beginning doesn't fully understand the scope. Maybe doesn't fully have the scope.

But the other contractor who's a little bit higher has got it. And trying to get the owner or the GC or whoever you are bidding to, to understand that and not just go after that nickel that they could save is tough.

Brad Wyant (11:37)
And now looking back on my career, having spent this time in the MBA it blows me away. That's the marketing professionals that I've worked with in my experience in construction. I'm sure somebody's going to be screaming into their computer audio or whatever they're listening to the podcast on. If they hear me say this, but all of the marketing professionals I've ever worked with have only put together the qualifications for.

A contractors bid on a project they put together the photos the headshots the biographies the experience list the resumes and the different projects the company has worked on that were like this one and how excited we are to come work for you and our goals and so on but they never get into the weeds of the actual bid itself of the coverage for the job of our qualifications of the estimates that we have for scope that hasn't been defined yet. And.

Marketing, which in the MBA has been defined to me as the act of going to market and everything that that entails, which is a pretty broad umbrella for that professional in that organization to not be involved in exactly what you're talking about, making choices about how to qualify things, making choices about how to describe scope of work that hasn't been fully fleshed out, how to bid it is crazy. But it ends up that the marketers do their thing and the estimators do their thing and never the twain shall collaborate.

Dee Davis (12:52)
different experience. really? Yeah. So I worked for contractors where the head of estimating is the head of marketing. they're industry professionals, maybe professional engineers, even, that have worked in the industry, they run the estimating department, and they are in charge of the whole shebang and marketing is under them. I think it's a better way.

to your point, it's absolutely better to have those people involved, but like everybody else, those people have bosses. And I've been in those bid rooms where estimating and that person, they've put together what they think what it's gonna take to get that job out there and win that job and build it and still make a profit. And they're being told by their management,

you need to cut overhead 10%. You need to cut something out. need to cut. You need to cut because they really, really want to win this job for whatever reason. Maybe they don't have a lot of backlog or something like that. So it's tough. And then, of course, there's the human factor. People miss things. I had a whole boiler that was missed. There were two boilers or three boilers on the job, and they only estimated

one or two. I had a whole floor of plumbing fixtures missed one time. these are these are people that are very, good at what they do. But they do this 100 or more times a year, 200 times a year. these estimating departments put crazy amounts of bids together sometimes. And so, yeah, they're human beings and they miss stuff.

Brad Wyant (14:18)
Yeah, who among us can say that we're faultless? we're trying to point out is that the economic incentive for contractors to add scope later on in the job is enormous because of the higher fee on change orders, even higher than 15 % in a lot of cases, and because the low bid award system is so. Tough to beat.

Trying to say that you're gonna add a ton of value, that you're gonna be the right person for the job when you're high, when you're five or 10 % high, is a really hard argument to make to lot of people, especially if they're not experienced with the business.

Dee Davis (14:49)
there is one other major factor when you're sitting in that estimating seat, you're always trying to second guess what your competition is doing. even though you might look at those drawings and say they're missing this, this and this, they're going to need that. And you want to include it because it's the right thing to do. What's your competition going to do? Is that competition going to include it or are they going to leave it out and change order it later?

contractors are put in a very, very tough spot. is so competitive out there and you have to win a certain number of bids every year to keep your doors open.

Brad Wyant (15:25)
Yeah, there's just a fact of life there for the survival of the company. And so as an owner, if you're somebody on that side listening to this podcast, when you're thinking about how you put your work out to bid, you're also going to market, you're marketing your job to potential bidders. Think about the incentives and the messages that you're sending when you're stating that fees will be a certain way in the change orders, when you're stating that there's a maximum fee for base scope. And when you're asking for low bid award systems, what are you telling?

your market about you and the way you want to do business. Some important questions to ask there. let's go back to the change order world. We're already on the job. We're already married and we're already doing the work. Regardless of the dollar amount, a lot of owners have conveyed to me that they feel afraid of being taken advantage of in a field they don't always understand. Let's say that you're just a company that does professional services work and you don't know a ton about construction. You just know you need a new office, but

You're afraid that once you're under this contract with us that the contractor might try to take advantage of you by using words like blinker fluid or other terms that are clearly nonsensical to some, may be easy to pull the wool of the eyes of somebody who doesn't understand. How can we as contractors earn the trust of our partners to avoid that mistrust and how can we build relationships?

without coming across askeez-y or trying to get something for nothing.

Dee Davis (16:48)
Well, and that's where owners reps come in people like me, who come in that's a big part of my job is evaluating change orders. And I use my technical background and my experience to say, no, no, that's, that's not the proper scope. there's sometimes where I'm like, Hey contractor, you kind of miss this whole piece of the change. as an owner's rep, you don't want unhappy subs either.

a sub that's hurting financially is a sub that's not going to perform well on your project. So if I see somebody missing a piece of the scope or like, Hey, you used a material that's way cheaper, but not the material you're actually going to have to use. You need to put the right material in there because otherwise you're going to Take a big hit on this change. I will absolutely help a contractor like that, but I'm also going to.

tell you, I think you're way out in left field with some of your pricing or some of your scope if it's not correct. So that's one of the ways that as an owner, you can help mitigate that is hire an owner's rep that has the technical background for whatever kind of building you're building. that can help you understand what is industry norm, what is acceptable, what is and isn't a change order. That's the other thing owners are afraid of. They don't understand

construction contracts and how things work in construction the way we do. So they don't understand, they're like, why is that a change? I don't understand why that's a change. Where an experienced owner can help you with that.

Brad Wyant (18:15)
And I think you bring up a very interesting point there about the importance of that change to the contract actually happening in the real world. Maybe that's one of the reasons that the change order fees are structured the way they are. Let's say that you're the subcontractor and you have the option of performing any given amount of work during a given period of time, a month, a billing period, and the change order work has the same fee structure as the original scope of work. You don't have any incentive to perform that change order scope

even if it's something that's just come down the pipe that has to happen now because you don't make any more money on it. If there's a change that's occurring on the project and it has to happen, then giving your subcontractor and your general contractor a greater incentive to complete that work is going to make them pay attention. It's going to make them write that change or in a way that is probably going to get approved as opposed to saying, yeah, well, I make the same amount on this as I make everything else. I don't really care. Whatever. So another part to.

to deal with their economic place.

Dee Davis (19:12)
Yeah, change order work is always going to cost more than it would have cost if you would have put it in the original contract documents, not just because of the low bid environment that we psychologically get into, whether we're really live in that low bid environment or not, but because once you're mobilized and you're working and you have to go back and work something into the flow of what you're doing, it's always going to cost more. It's a disruption. Now I have to stop and go procure that. I have to submit on that.

I have to figure out where I'm going to put it in the schedule. have to remobilize a crew or rework so that we can get it done on time. It's always going to cost more. This is part of why we say slower is faster at the beginning of a job. Because if we slow down and get it right to begin with,

It minimizes the change orders, which minimizes the disruption and keeps the cost down.

Brad Wyant (20:05)
how expensive it's going to be to do work in a change or environment instead of including in regular scope and having to incentivize your contracting team to work on that change or scope beyond the incentive you've already given them for their base scope. There's also this time crunch involved in change or as usually. If they're not approved in time, work may slow down, which may cost the job even more. So. One of the things that I noticed when I was reading through.

The requirements for change orders is that they have a time window both on the contracting, the construction team side, and on the owner side. If an owner does not approve or respond to a change or submitted with the proper format in the proper language within a certain amount of time, the contracting team is eligible for schedule recourse, which is fair because not doing work that has to be done can slow down a schedule.

Oftentimes those terms don't fully take care of anybody and just the contractor can still get screwed on time. What have you seen when it comes down to the time pressure associated with change orders on schedules Dee? I'm sure that you've had that crop up before.

Dee Davis (21:11)
sure, and of course it depends on what the change is and when it's happening. If you're in the 11th hour of a project, this is more true than any other time in a project. Or if you've got something that's got a really long lead time, like let's just say you decide to add a piece of equipment that's got a 32 week lead time and even if it happens towards the beginning of a project, that may be a huge impact if you don't hurry up and get that change processed.

The other thing is, is contract language versus practice. So you spoke about some of the contract language that might be in there, but what I find is what there's contract language that will tell you things like a contractor has 10 days to respond to an RFI that triggers a change or something like that. They have 10 days to get their pricing in. Well, I've been on jobs where

months and months and months and months go by. And we don't still don't have the cost. I have had long projects where I've had to go tell them, look, legally, I could tell you to go pound sand and I would be within my rights and you have to perform the work without reimbursement because the contract language says if you don't submit it within this many days, you're entitled to no cost.

Now is that done? Not really. That's the contract language versus the practice. We don't want to treat people like that. it's a string we can pull if we have to and I've had to pull it before. Contractors, it's in your best interest to get this stuff priced. When I was an installing contractor, I used to call change order pricing sorting socks. I hated it. I hated doing change order pricing. It's so tedious and time consuming.

We didn't have, at least at that particular contractor that I'm thinking of, we didn't have software. It was a manual takeoff process. This was when like Bluebeam was in its infancy and there's ways of doing it much faster now, but it was a manual process. I had to go in and scale drawings and figure out how many lineal feet of pipe, how many square feet of duct.

I had to go in and manually do the entire thing. So, and I had to do it myself because unless I had an experienced PE who could do it, you can't afford to get it wrong. So it's very, very time consuming. So you put it off, you don't necessarily jump right into it on a really big job. You might have somebody who's dedicated to that, but for the most part, you're out there in the field, you're trying to do your day job and change orders is just something that comes up in addition to it. So.

You you wait until you got six or eight of them to do, and then you sit and you sort your socks, right? You just crack down for however long it takes and get them all done. So what's in your contract language and what's in practice may be very different. Again, this is something that you need to communicate about. It is really bad form to wait and wait and wait because you as an installing contractor now could be causing schedule delays.

Then you get it all the way through the GC to the owner side and there's more delays because now somebody on the owner side has to go through every single change that comes and evaluate it. What is the scope? What's the contract language? Say, is this really a change? Is all of it a change? Is it priced properly? It's a lot of work.

on the owner's side to go through it. So it's not going to be instantaneous. And then sometimes there's a chain of command for getting it approved. if it's a large dollar amount, there could be meetings associated with it. Lots of people have questions. I've been in multimillion dollar change order meetings on the owner's side where, a contractor's coming and asking for two and a half million dollars for this change order. Well,

Guess what? They have lots of questions for me. Why do we have a contractor that's asking for two and a half million dollars of change? What happened?

Brad Wyant (24:52)
Mm-hmm.

Dee Davis (24:53)
We all have bosses.

Brad Wyant (24:54)
I have a fun example from my personal life that has nothing to do with work, nothing to do with any companies ever worked for just a friend. One of the things we do at the MBA program here is we put on a show every year, kind of like a one night SNL that we call the Follies show. And for that show, we had to hire a sound company and a lighting company. And the sound company comes and they do all their setup and.

the conversation I remember having with the sound companies with it, they were going to hire the lighting company as a subcontractor to them so that we only had to write one contract to the main sound company. But then three months after the show was over, the guy with the lighting company, he's a one man operation who just comes and sets his stuff up, texts me saying, hey, I just realized I forgot to send you a quote or an invoice, but I haven't been paid. And I'm all, what do you mean you haven't been paid?

that was three months ago, weren't you under these guys? And so the moral of that story is that you don't want to be in his position where you're asking for money when no one expected you to be asking for money, let alone had that in their minds. And as a contractor, although it may feel like sorting socks, you have a lot more leverage about that cost when you're getting ready to do it or have just done it than when it's

a lot later down the road. More importantly, perhaps in big jobs, everyone remembers what was done and what was said a lot closer to the time you had that conversation than they do three months down the road. people are digging through their emails or they're trying to look through their handwritten notes. You do not want to be in a position of saying, what, that extra work? I remember asking you, do you remember doing extra work? I don't remember doing extra work. And then you're like, oh no, I'm never going to get covered on this.

Dee Davis (26:32)
I call that the amnesia factor.

Brad Wyant (26:34)
Yeah, people get short memories all of a sudden with that kind of thing. You do not want to be left holding the bag. Your leverage goes down precipitously once the work is in place. It's much better to get paid upfront and then be able to do the work. But that's where the relationship side of things comes in.

Dee Davis (26:51)
Absolutely. whether you're an installing contractor or a GC, but GCs, you need to be tracking really closely all these changes so that you know what's outstanding, so that you know what you've received and what you haven't received and don't piecemeal it if you can help it. And this is another problem that happens. So let's say you have a change that involves three or four different trades.

These three contractors are really good about getting me pricing, but I have this one over here that's terrible about getting me pricing. These guys have gotten their stuff in, so I'm going to submit and leave this guy hanging out. Well, when the owner is reviewing the change, they're assuming that the entire scope is there. They may not realize that someone's missing. Sometimes the layering of the contracts can be kind of confusing, like you're saying.

you know, with your lighting guy and your sound guy. Sometimes you've got somebody that's two or three tiers down, and if they're missing, I might not notice because I'm assuming that the electrical guy's got the low voltage or that, the data guy is under this guy or, whatever. so it can be really confusing if you have a lot of subs, who's under who and trying to remember that. So you may not notice that something's missing.

Getting that stuff in like you're saying, the leverage is massive. Soon after the event, you do not want to be trying to bargain basement at negotiate your change at the end of the job. It's not now the owner's The GC is mad. Everybody's trying to close out the job. You're trying to come back and get your changes. I just finished a job with I had one contractor that was.

awful at getting their changes in. And every change that came through excluded their scope because they refuse to, they just refuse to cooperate. You know, and my, when I have a sub that refuses to cooperate like that, I start going back to that contract language and going fine. How about a zero change order? How's that? You feel a little bit more cooperative now? I mean, you don't want to be a jerk, but at the same time, you're kind of messing up the whole thing.

Owners are trying to project the end cost, especially towards the end of the job. The further the job gets along, the more narrow that window is for mistakes on cost. if you went back to your boss at the very end and said, actually my tier subs had all these costs I wasn't expecting. It's no different.

Brad Wyant (29:07)
And a lot of that is where the relationships come in. If you are a subcontractor or general contractor submitting a change order you want to be in a position of having it right the first time. I once worked for a boss who looked at me funny when I said, no, I think they did this calculation wrong. They're not including enough costs here for this. I'm to go back and talk to them. He's like, no, submit it. If they made a mistake and

capitalize on that $500 we just saved. And I'm like, all right. This is not a one shot game. This is back to economics. I'm alluding too often to economic things that I haven't introduced on this podcast. In economics with the two by two matrices that the famous economist, that was his whole thesis.

there's two types of games when you're talking about those Nash equilibrium either one shot games where you only interact with these people one time or multi round games where you keep interacting with them over and over and. In construction, especially during the middle of a project. You're going to see these people again if you don't do somebody a favor if you for lack of a kinder word do them dirty on one round, they're going to remember it and they're going to.

Treat you accordingly for the rest of that interaction trust is easily lost and hard won. The flip side of that coin is that if you go back to that sub and say hey I think you missed something here you really ought to take this into consideration are you sure this is many hours as you want for this. And my god yeah I totally miss this part of that that's huge thank you for saving on that it could be nothing it could be five dollars but the fact that you came back to them and gave them the chance to re up that number to to adjust. Means the world means that they.

have someone they can trust on the other end of the phone when they're working with you and that will serve you well in your dealings.

Dee Davis (30:44)
Yeah, absolutely. Trust is paramount. Whether you're dealing with vendors, you're dealing with contractors, you're dealing with owners, it's all about trust. I've had so many vendors and subcontractors that I've done that to them. Like, I don't think you have the right number here. I'm not sure exactly what's wrong, but something's wrong because you're one and a half times or two times higher or lower than everybody else. Something's wrong. go back and take a look and

let me know what kind of questions you might have. we can walk through it if you want. And sometimes they're going to say, that's my number. OK, but at least you tried. So why do we see so many changes on projects? I think we all realize that a lot of it is going to be one of two reasons. There's going to be either design misses, which happens, or owner changes.

The third reason that we see it sometimes is constructability. Sometimes we can't build it the way it was designed for whatever reason, maybe some unforeseen condition, maybe just the interaction of this trade and that trade and we have a little conflict, a coordination issue, or it was just a flat mistake, which happens, we're all human.

Brad Wyant (31:46)
Well, right now, I even lump that constructability issue. Under a design issue because. The responsibility is on the design team to create a design that can be built that's contractual, so. When we're talking about these contentious change orders, the owner is sitting there. Listening to their design team and listening to the construction team and when their construction team comes in and says hey.

We have to change and it's going to cost more money because this design was never going to work in the first place.

They're gonna wanna go back to the design team and say, what the heck do I pay you for? And for a design team member, an architect and engineer to dip into their errors and omissions, insurance is a very costly thing. I don't fully understand it. I'd love to hear more from you Dee about that, but it's from what I understand, a not easy thing to do. But the owner gets stuck holding the bag and they have to hope that they have enough contingency fund to deal with any.

that they hadn't predicted that are not anyone's fault, but that should have been designed in.

Dee Davis (32:40)
this happens a lot sitting in the owner's chair. They're trying to explain what is a change order, what isn't a change order, why do you have to pay it as an owner? The owner's really responsible for all the changes for the most part during a project. And I have a lot of owners that will say to me, I don't understand why this is a change. I mentioned it in a design meeting that we needed to do this.

That's not the same thing as incorporating something. So it happens a lot. People feel like, I told them that I said that. Okay, that's fair. I get that you said that you might've even said it more than once, but when we do design reviews, making sure that all those details get into the design if it didn't get into the designs, merely saying it in a meeting didn't do anything.

It just made you think it was covered and think it was off your plate and onto their plate. It's actually still on your plate owners until you make sure that it got into the design. So going after a design team for errors and omissions. So I've had some big ones on some jobs. I had a job where.

a code wasn't met. That's a big one. well, we have this room and we have this configuration and ooh, I actually can't do what I did in the design. That's a code violation. That's huge. Of course, yes, is that is that a design issue? Absolutely is the designer responsible for that? They're responsible for correcting it.

Brad Wyant (33:48)
Hmm.

Dee Davis (34:09)
I've got the building three quarters built and I have a huge code issue. I've gotta go rip out work, modify it and redo it. Who's responsible for that cost? Can you go back and go after a designer's error and omissions? Yeah, you absolutely can, but usually the contract between the owner and the designer says something like.

if it's 15 or 20 % of the total project cost.

It's a very big number. So it has to be generally millions of dollars of impact for an owner they have to either take them to court or come up with an agreement and get their legal involved.

I don't see it happen very often. It happens once in a while. I've seen cases where I wish it could happen for the owner's sake because the design flaws were so bad. I would even go as far as saying egregious because I had one project where I could see the design flaw and I went to the designer and I said, this isn't going to work the way you've designed it. There's no way this system's going to work.

you need this, this and this added into the design and they refused to listen. I told them, told them, told them. I went and I got somebody from the owner side. They told them and we just had a flat refusal to cooperate. Well, guess what? We get into startup and commissioning and it wouldn't work. And we had to go back and add it in. And so yes, that designer got sued.

and was kicked out and never got to work there again, as far as I know.

Brad Wyant (35:35)
But it took suing them. It took the client hiring lawyers to go after them for the architect or whoever the designer was to unlock their errors and omissions insurance. That's the thing I learned through the grapevine is that you can some terms and conditions apply that you can only access that funding if you've been sued, if you've been brought to court. So that's a big thing to keep in mind as an owner. The liability you're taking on by.

hiring an architect or designer of any kind and then hoping that their design is complete. I mean, even if the city misses it, the city's not gonna come bail you out. If they approve a plan and then see in the field that it doesn't comply, that's still on designer and it's still on you, because the designer's not gonna lift a finger unless you sue them.

Dee Davis (36:18)
Well, and even one up on that, even if they miss it in the field and during inspections, if you have a code compliance inspection and they come out and they miss it, the designer is still on the hook for it and the builder is still on the hook for it. The code official is never going to be on the hook for it. So it's tough. I guess I would say that there's been many situations where

It was hundreds of thousands of dollars. And they were not sued. errors and omissions was not called on. what ends up happening is you end up getting the designers upper management. Maybe they're legal involved and they sit down and negotiate with the owner. How much more work do you want to do with this owner is what it comes down to. Your reputation.

Word travels fast. It's a big, small industry, especially in any given area. Everybody kind of knows what goes on. Lawsuits are pretty rare, to be honest with you. It's usually more of a negotiation and more often than not, the owner just sucks it up and pays for it. So owners, it's tremendously important that your owner's contingency, as much as you want that to be minimized and you want that to be a low number,

You need to make sure that you're carrying enough contingency in your projects to cover for these kinds of issues because you're going to be on the hook for paying for it, whether you like it or not. It's just how it works.

Brad Wyant (37:35)
Very well put and I'll put in the last word on that subject for contractors. Think about how much liability insurance your design team is carrying and think about how much insurance you're carrying. If it's at all muddy about whose responsibility some delay is or some installation problem is or some design problem is, they're gonna go after people with the biggest insurance policy, the greatest amount that could possibly pay out first. I have a buddy I've met here at the MBA who

insurance company to do with construction and other big policies and he said yeah, that was the default was everyone would just go after the people with the biggest insurance policy, not who's right, not who's wrong, just where they can get the most recompense. So. Keep your guard up.

Dee Davis (38:15)
here's the thing I think I said this in last week's cast, everybody's going to named on the lawsuit. Okay. So it doesn't have to be your fault. If you were there and you may have had any kind of culpability, you're going to be likely to be named in the suit. So I have been involved in a couple of projects that have had lawsuits. It is not any fun. Believe me, you do not want it to get this far. So what can we do?

about all the contention around change orders to make sure that we don't end up in this position, Brad.

Brad Wyant (38:45)
We can try to build better relationships. We can try to have better conversations, set expectations. We can try to be transparent, but mitigate our risk, also known as CYA, There are tons of things you can do to build the trust around a fair process with your team that are gonna set you up for success and for avoiding these kinds of issues.

Building trust early on the project, regardless of whether their changeover is coming yet or not, is key to having a great change order experience on a job. What you want to do is set expectations about procedure with your owner. like we talked about in beginning of the podcast, you want to. First read your contract documents, then read your general requirements.

and finally have a conversation with your owner about what procedures they expect and use those to form what will be the procedure for the job. Examples of that could be, are you going to create a change order for every RFI just as an automatic thing to put on everyone's radar? I've been on jobs where this is the case where a lot of scope was changed that had a lot of impacts and the owner just wanted to see that there was a potential cost on every single issue, even though

Maybe half of them weren't going to end up having costs so they could have them on their radar. Do you want to associate a time impact with every change order? You're eligible to request that on every change order that you submit. And there's often a contentious argument about whether the 10 % markup that the subcontractor gets has to do with the general conditions and requirements their staff that they needed to keep on for longer or not. But.

having that conversation about whether the schedule needs to be extended for each change order or not is important. Most importantly though, you want to build trust by correctly pricing and detailing the changes of any given change order. Even if you just had a conversation with the owner about it and you're submitting what you told them you're going to submit, write out in careful language what is changing in the change order, why it had to change, so that if you had to come back to it in a year or God forbid five years,

in court, everyone will be clear that what's changing was written out at the time.

That's not to say that you should write an essay every time there's a change in the color of the paint scheme in a room. Don't overwrite, but write fully enough to explain to anybody who might not have been in the room what's changing and why.

Dee Davis (41:08)
you bring up an important point and this goes for submittals. This goes for RFIs. This goes for change orders. You are writing this not for you. You are writing this for the person you don't know that's going to read this later and have to try to understand what happened. So whether it's because this is all going into a TOP on a a GMP project, maybe your project gets audited.

later. There are a lot of owners, especially if you're on big projects where they get audited and they're going to pull a few changes out and they're going to come back and go explain this. You better be able to explain it. If it's vague, if it's not detailed, if it's squishy, it's not good because what can actually happen on some of these projects is they can come back and get their money back.

I work for a few different companies as an outside contractor where I will go in and I'll evaluate projects after they're done. And I look at cost impacts and I look at contract language and stuff like that and I'll say, you know what? These five changes right here should have never occurred based on what I can see here. The owner was improperly charged and they will get to go back and get their money back.

whatever position you're in that's generating the change or the RFI or the submittal, be clear in a submittal. Don't give me 20 catalog cuts with 50 different model numbers in it. You know, this option, that, like, tell me what you're providing in the RFI. Be specific about your question. Where does this apply? Is there a cost impact? Is there a schedule impact?

and make sure that you're phrasing everything correctly. And then when you submit that change, detailed backup. There's no secrets here. it comes to a change or don't give me a page that says, pay me $15,000. For what? What am I paying you for? Not only do you need to describe it to me, but I need the details. I need to see how many lineal feet of pipe, how many lineal feet of wire.

how many widgets are you providing to verify the scope? So that kind of detail is important. And I can tell you as an owner's rep, I'll reject a general one every single time. I won't even take my time to look at it. If you give me a one-sheeter that says one sentence and a single number.

I'm rejecting it. Sorry, he's not even gonna waste my time. Yep.

Brad Wyant (43:28)
I'll tell you to get off topic for a second. think that the subcontractors that are most guilty of doing your saying on submittals of just giving you a blanket package plumbers.

because the electrical people have to like pick out the light fixtures and they sometimes substitute with the Chinese one or whatever HVAC that's so specific. They've to give you the right one. But the plumbing people are like, yeah, we got we get these things. We got those fittings. This guy likes to those fittings. That guy likes to order these fittings. We don't know what's going be on the truck on the given day. Just approve all these for us. It's like, I don't know if I want to do that. I want to just approve what I want. Thank you. Or even even better, you get that.

whole blanket submittal approved with 500 different types of fittings with three different companies and then the guy shows up with a fourth company and a different fitting and you're like, ah, come on, let's get serious here, let's get real.

Dee Davis (44:13)
Yeah, I'm a bit of a submittal snob, I guess. for me, yeah, you give me a big blanket submittal like that. Also going to blanket reject it. I'm not going to waste my time going through it and trying to figure out what in the world you're talking about, because some of it's going to be appropriate. Some of it's not going to be appropriate. I literally had a seismic...

vendor one time, I was on a hospital job in California. So it was OSHPD which is now HCAI which is the governing authority for hospitals and seismic is a big deal in California. I had this one vendor hand me their entire product catalog. literally like the whole book as their submittal. And I just looked at him and I said, what are you doing? And he's like, well, everything we need is in there.

Brad Wyant (44:59)
thats not the point.

Dee Davis (44:59)
I'm not doing that. I'm not doing that. I'm not submitting that. And if you want to be on this job, you're to put together a proper submittal or we're not going to be working together. That's how that's going to go.

Brad Wyant (45:07)
I get it. It's a really arduous project. It's like why don't we have AI to do this yet? Why can't AI just read the plans and specs and tell me exactly what I need to submit on and let me package it myself? But we're still in this world of not quite smart enough to have AI that does it for us.

Dee Davis (45:25)
I can tell you from an installing contractors perspective, you're always going to have your favorite products. Right. So you're going to have the seismic company you want to use. You're going to have the plumbing manufacturer that you want to use. maybe you could use two or three different manufacturers, but you're going to have the one you want to use. You're going to have, your favorite vendors and materials and products for all kinds of reasons out in the field for different applications. I think plumbing comes up because.

The thing about plumbing is there are so many different kinds of systems. And each one of those systems has multiple manufacturers, multiple materials. So it gets really complicated really fast and it takes a long time to learn all the nuances of commercial plumbing because of all of those things. It's like I could use these three or four different manufacturers. Why do I want to pick that one? Well, I want to pick that one because out in the field there's this and that advantage. Okay.

It's a good product. don't have any problems with it. It's better to install. We get better product support. they get fast deliveries. there's 100 reasons why you would want to pick this vendor over that vendor Unfortunately, I don't think AI is ever going to be able to help us with submittals because in the specifications most of the time multiple vendors that are.

potentially options. sometimes they even go crazy and there's like 10. I've read through specifications where that vendor doesn't even make that product. I've read through specifications where that vendor doesn't exist anymore. mean, just sometimes the contract documents are not the best and you really have to have a human brain that knows what's going on in the industry that knows how to procure.

for your specific application.

So all of those documents are really, really important.

Brad Wyant (47:04)
Let's talk about what you can do as a general contractor to make a plan with your subcontractors on how you're going to handle change orders together, because that's a whole other side of the equation here. Communicating required design changes to your subcontractors in the form of RFIs usually associates, at least as a checkbox in Procore, think, where you can say there may be a change in cost, there may be a change in schedule.

associated with this change or there is no cost, there is no schedule impact. The May is a coverall and most subcontractors I've ever worked with click that and say, yep, we might have cost with this, but you often want to set a rule of saying, okay, you got to tell me if there's going to be a cost associated with this or forever hold your piece within 14 days after the RFI has been answered. And after that point, if you haven't said anything, we're going to assume that you have no cost and we're going to move on.

There are often terms in the contract that help you out with setting those kinds of standards. And you have to have that conversation with your project manager to remind them that that's what the contract says, because often project managers coming on to the job, having not had the time to read the contract if they wanted to in the first place.

Another big thing that comes up in the general contractors job is to determine whether administrative hours are billable for subcontractors. Unlike general contractor staff, who for the most part are on that job until it ends, until it's scheduled to end, subcontractors are often billing out their administrative professionals, their project engineers and project managers, and even their superintendents sometimes to multiple jobs at once. So.

If they're having to spend more time than they thought they would on a job because of the changes, because they're having to price them, because they're having to deal with the engineering implementation, they may want to go after those changes. It's a lot better to have the conversation about what the rule is going to be on that before you have to deal with it. Then when you're about to deal with it and your subcontractors coming to say, Hey, all of sudden I have cost. don't know how to deal with, I need to change it right now. You don't want to have to have that conversation in that moment because a lot more emotions are going to be involved.

Oftentimes I had to look at subcontractors and say, no, no, no, there are terms for this in the change order language of our contract. You can't just do whatever you want. And they say, well, I'm not abiding by those. That's all of sudden another emotional conversation that has to happen. Any thoughts on those issues, Dee

Dee Davis (49:20)
that's where extended GCs come in. extended GCs are when general conditions are when the contract schedule slides out, which happens not infrequently in this industry. So we are supposed to finish January 15th. Now we're not going to finish till March 28th. So that happens all the time in the industry. That's called extended GCs. You need to have this conversation. with your owner.

because generally on larger projects, I would think this is true for most owners. I don't generally like to see the little peppering of administrative costs in every little change because first of all, if it's a bigger job, you're not really being impacted. And these people are salaried, right? So most...

project engineers, project managers, project support people are salaried. You're only paying them for 40 hours a week. I'm already being charged 40 hours a week for those people. unless they're there longer, like between that January and March date, you're not really incurring any extra cost. Even if you're working overtime and things like that, it's different than the field. The field is hourly.

That's part of what you have to look at too, is like, we going to deal with these as we go and little blips and pieces, or are you going to wait to the end and see if you really truly have any extended GCs? Then let's talk about your,

compensatory rate per day.

And that's where extended GCs come in. So let's say your, your compensatory rate is $500 a day, a thousand dollars a day, $5,000 a day, whatever it ends up being, depending on the size of the staff and the job. It's you to calculate that by however many days you're delayed and the schedule is extended and that's your extended GCs. And there may be some other things like, you know, trucks or trailers and you know, all these other things, it depends on how it's all calculated,

sometimes owners will ask upfront, what is your rate of compensatory delay? So that they know, what is the risk? They can see the schedule's probably gonna slide. We're gonna say, okay, well, if we know it's gonna be $5,000 a day, let's kind of plug in about 20, 30 days, just in case we need it to hold onto that money.

Brad Wyant (51:29)
Yeah, you almost want to do owner training in that circumstance. You want to have your owner so ready and so understanding of the cost environment they're working in that when you're having a bad cost meeting, you're saying, and we think this is going to be a five day extension of the GC's and it's going to be five more days of schedule in the height of the project when everyone's here. They'll say, okay. And so that's going to be what? Another hundred grand because they're doing the math in their head already. And you can say, yes, that's, that's when you know.

Your communication with your owner is great. There on the same page you are. You're meshing well as a team. That's a really good sign. OK, so what else can we do about the contentious nature of change orders? one of the statements that gets thrown around our industry and many others is to CYA to be transparent, but mitigate risk Your client deserves the truth.

Even when the truth means you make money. I often find it's hard to convey to a clients that. This is going to cost you more money and it's also going to make me money. There's a frustration around that for the client like, well, how do you get to make more money when there were all these mistakes and stuff? It's. You have to have the conversation with your owner that we just had earlier of saying, well. I'm here doing a job.

understanding the principles of that alignment that you're trying to create between parties, even though that costs money, is very foundational to the contractor owner relationship.

Transparency is another expectation to set. Oftentimes when there's a big negotiation happening where a subcontractor has submitted a cost that no one agrees with and the owner wants you to beat them down, the subcontractor wants you to fight for them, everyone wants to hear, I'm going to get you the money you deserve or I'm going to beat them down. But the best expectation you could set is to say, I'm going to make a process that's fair. We're going to evaluate the facts. We're going to come to an agreement. We're going to broadcast this to everybody and we're going to work at it until

Everyone's on the same page. Making money on changers is not a zero sum game. It's going to keep you in the project for the right reason and demanding transparency from everyone else by promising a fair process is going to incentivize everybody to get on that same page of telling the truth. And in every ethics class in the world, they're going to tell you that teaching telling the truth is right thing here. Besides that, I'm to tell you that telling the truth is a lot easier because you have fewer things to remember. What lie I told here? What lies hold there?

If everyone's honest, if we're doing the right thing, if we're working by the facts. We have a lot more bandwidth emotionally and intellectually to do the rest of our jobs to live the rest of our lives.

Dee Davis (53:51)
100 % agree. I've been put in the position of being asked to lie to a client and I walked away. I'm never doing that. it's not who I am. It's not in line with what I believe professionally and personally. it's bad karma. It's your reputation. So we got to make sure that we're doing the right thing for ourselves, for our clients.

Sometimes, jiggy situations come up and if you're ever put in that position, you're gonna have to make a moral choice that you're gonna have to live with. So I hope no one listening to this has ever put in a situation like that. It's really, really not fun. But it happens. There are people out there who unfortunately give our industry that reputation of, contractors are bad, they're out there

to hose everybody over and get the big change orders. And I've seen that now and then. I'm happy to say that it's not largely true.

Brad Wyant (54:42)
And I think the thing you see most often is people. Wanting to lie because it's easier because they've made a mistake and they want to lie to cover that up. To protect their reputation.

I think that's a misperception besides being the wrong thing. Trying to lie now to cover up a mistake that you made is not going to be easy in the long run. It's much easier to admit your mistake as hard as that is now and live with the consequences and earn the reputation for being somebody of their word than it is to lie, lie, lie, to cover up your mistakes, not do anything about making fewer mistakes and then get caught in a lie and have all of your work questioned that you've done.

in your whole past. I've seen people be fired from jobs I was working on for doing that within the structures they were working within. I've heard stories from friends of mine in the business of people who found out to be hiding costs because they had made a mistake on the general contractor side and were immediately let go and that company was forever tinged with that client. mean, it gets ugly because people don't want to do the hard for now thing and admit their mistake. So don't get caught in that trap. Know that

as easy as it feels now to lie about this, because then nobody's going to ask you about it, and you're not going to face any penalty in this exact near future, it's going to come back around a bit. It's going to be harder to deal with when you're out of a job or when your reputation is shot in the industry or both. So let's talk about how we can prevent change orders in the first place. How can we stop jobs from getting to this point of change orders flying back and forth constantly of having to go back to the owner for costs over and over again?

One of the things that I've seen on jobs I've worked on is to negotiate a change order contingency fund and base it on the design status of the project when you reach that contract agreement. So let's say you're on a job, you know it's complicated, you know it's gonna have a ton of different elements and you know as you're signing the contract, do that work, but there's a lot of design that hasn't been figured out. If you're at 50 % CDs and you know based on your company's cost data that

Costs inflate to a certain amount of 100 % CDs. You could make an argument here to say, hey, let's use this math on projection of cost to say we're going to add this much contingency funding to the job that we as the contractor get to control to cover design misses. That's one way of going. Sometimes owners want to own that contingency fund themselves, which ends up being the same change order process itself. That way they have to do more paperwork, but they have more control.

What have you seen around contingencies like that? Do you have seen different thoughts than those on how to control that kind of a fund?

Dee Davis (57:09)
of course, any owner is going to say, give me a zero change contract. I can say that in almost 30 years, I've never been on a project that had zero changes. I had few changes. think I had, I think my record was about 20 changes on a job. was not a huge job, but the owner didn't have very much budget for it. And they did a really good job of not coming up with any design changes. just, they controlled

their urge to change and continue to add to the project. And we had some design misses, which was the source of the 20 or so changes. These different funds you're talking about, it's a very realistic way of acknowledging that you're going to have some changes. Whether they're owner-driven changes or they're design misses or...

However you want, guess I'm sure the designers listen to this cringe every time I say design miss and I'm sorry, but that's, it's okay. Every job has design misses. It's just these projects are complicated and we're all human. So there are going to be some misses or coordination issues. It's a way of acknowledging that we're going to have those things and coming up with.

a contingency bucket or a continual contingency bucket. I just had a project where every change had a set contingency in it. so let's say the change came in at $38,000. Well, there was a flat 5 % contingency that went on every single change because we were pricing these things rapidly.

and we were asking for fast turnarounds from everybody. So we were assuming there was going to be some margin of error. And we just left that contingency to build and we dipped into it now and then. The only time we would ever challenge that is if it was like, look, this work is actually already done. We know exactly how much it costs us. You don't need contingency for that change. So we would, we would zero it out, but we had, I would say over a thousand changes on that job. So those

is a very big job, but those buckets add up and it gives you some flexibility to limit the surprises later.

it's the late surprises that are really, really tough for owners to swallow. When they get to the end of the job and they think, okay, this job is going to cost me $20 million and now it's going to cost me $21 million. Uh-oh, I don't have another million dollars or where am I going to go find another million dollars? I'm not holding that much in contingency that late in the game. Owners reduce their contingency over the course of a project just like contractors do. So it's the late changes that are the problem.

Brad Wyant (59:34)
Absolutely. In your opinion, is there such a thing as a change order that is too small? mean, have you ever talked about setting a limit on how much can be submitted for additional cost?

Dee Davis (59:44)
Yeah, absolutely. This was something I practiced as an installing contractor. If it was under a couple thousand bucks, I'd log it, but I'd leave it. trying to, caught, there was a study that was done a number of years ago about how much it costs to process a change. And then I did my own study on it some years later as I was.

Starting to teach classes on change orders. The information was very old and so I kind of I used one of my projects to update the information depending on the project and a number of different factors. It can cost you anywhere from $2000 to $10,000 to process change. So if it costs me $2000 to process a change. Why would I?

go for a change this $2,000. I'm zeroing it out. Now, does that mean I'm going to completely forget about it or let it go? It depends. If there's a handful of those on a bigger job, I can let all that go. I'll figure it out somewhere else. It's not going to kill me. But I have had one job where I kept track of

that log and those $2,000 changes or $2,000 less changes added up to several hundred thousand dollars over the course of the job. So I did sit down with the owner because this is called death by a thousand paper cuts, right? It happens. And I went and sat down with the owner and I said, listen, I've been keeping this log and I didn't wait until it got up to $200,000 to say something. As I saw it growing and growing and all these little teeny things happening,

I mentioned them and I said, and they said, Hey, keep me apprised as to what the total is. And I said, okay. So every couple of months I'd let them know there's this is my total. This is my total. Well, when it got to a certain point, I said, you know what, we're to have to do something about this. And they said, no, you're absolutely right. I didn't wait. I think that's really the key here is the communication. I didn't come to them at the end of the job and hand them a $200,000 change order and say, by the way, I'll even though I didn't say anything about any of this stuff for the last two years.

here's a $200,000 change order. didn't do that to them. I built trust with them. I let them know what was going on. I showed them the log I kept them apprised as to how much was accumulating here. And at the end of the day, they agreed with me These are all little tiny things, but they're real things.

As I was keeping them apprised, they kept it in the back of their head for their contingency. So that the end of the day, when I said, you know what, I'm going to have to do something about this and it's up to a couple hundred thousand dollars now, this is a multimillion dollar job. They, you they said, you know what, you're right. That's fair and reasonable. And we settled the change.

Brad Wyant (1:02:17)
There you go.

Well, let's talk about negotiation on change orders. There's often this conversation that comes up of the owner wanting their general contractor to sharpen their pencil or the general contractor wanting their subcontractor to sharpen their pencil if they think there's too much fudge in a change order or if they feel like they can get something more out of them. How often do you see change orders be negotiated?

Not push back on and said this is not a valid cost, but negotiate and said, hey, I know this is this much, but I need you to help me out here. What are the ramifications of that in the long term? Is it a good practice? What do you think?

Dee Davis (1:02:51)
Well, I think it depends. Are we talking about all the time or some of the times? And it depends on the situation. I worked as a trade contractor. I worked with an owner who was from another culture. And it was a culture who loved to negotiate and wheel and deal and wanted a bargain. And I did many projects with this project manager. And I learned very quickly that I priced the change.

It's here's the change, here's the price, and I don't put a bunch of fluff in it. I've never been that kind of project manager. And she would say, well, give me 50 % off. Give me a deal. I'll give you half. You can't give me half. I'm going to lose money if you give me half. Well, I need a deal. and I finally sat her down and I said, listen, we can go about this one of two ways.

I can either price the change that fairly that's in front of me and give you that number and that's the number or I can price it double and give you 50 % off. Which would you prefer? And she said, give me 50 % off. And I said, done. So that was my strategy of dealing with that particular owner was I took, I priced the change. literally doubled it. And then she would, she would cross it out, right? The number that was 50 % so that she felt like she was getting into.

It was silly, it's ridiculous, but it really happened. And that's an extreme case. The other cases, the more normal cases that I come across and as somebody who evaluates a lot of changes, if I can establish trust with that particular trade contractor, and that's what I try to do at the beginning of every job, I start off just automatically assuming you're gonna do the right thing.

If you show me you're not going to do the right thing, or you show me that you're trying to play games, then I'm going to call you on the phone and we're going to have a conversation. And I'm going to say, look, this is what I need from you. I need you to price the change reasonably and fairly. And that's always my go-to phrase, fair and reasonable. You're here to make money. That's a given. I'm not trying to get you to not make money, but it has to be fair and reasonable. I have to put my name on it and I have to be able to sleep at night and with a straight face.

give this to my owner and say, sign this, it's good. I'm okay with you making money, but it needs to be fair and reasonable. So that's the kind of negotiation that I try to manage in the very beginning. And I say, look, these kinds of like charging me extra hours for your project manager to price the change, their salary, come on, what are you doing? That's baloney and you know it.

it's not costing you extra money to price this change. Now, if we're talking about a really big change, hundreds of thousands of dollars, millions of dollars, and you have to get your estimating department involved and all these other things, and you go through all this stuff and take all this extra time, okay, I think I can get on board with that, but let's talk about it.

Do you play hardball all the time? No, of course not. You can't because you're going to start creating a really contentious environment with all the contractors. But at the same time, contractors, you can't play hardball all the time either and say, I'm going to come in, guns a blaring every time. And I'm just going to try to eke as much out of this change order as I can possibly get away with because you're not building trust. Your changes are going to get approved.

much, much faster if we can develop trust. There are certain contractors on jobs that yes, I'm gonna look at it, I'm gonna glance over it, I'm gonna spot check a few things and I'm gonna push it through. That's how we want this to work.

Brad Wyant (1:06:07)
Right. We don't want to do work. Nobody wants to deal with change. Or it's like we said at beginning of this podcast, it's a dirty word and construction. It takes more time. It's a pain. And I think it all comes down to what do you want the relationship to be based on? Do you want to based on reciprocity where you scratch my back, I scratch yours, and there's this horse trading thing you're constantly keeping in your head. Okay. Well, they kind of took me over on that change or I'll take them over on this change order and it will all balance out. Or do you want there to be an establishment that there's going to be a fair process that you're going to listen?

that you're going to analyze, that you're going to be fair in your dealings. I think that the relationships I've built in the past where our trust was built on fairness, as opposed to trust that it would all level out at some point, are the stronger relationships. Because at the end of the job, everyone tries to squeeze that little bit for themselves to make that last little trade go their way. But if it's fairness, nobody feels that way. Nobody feels like they have to win at the end. Everyone feels like they can end on a strong note because they've been dealt with fairly the whole time.

I thought I'd end our change orders here on a lesson from my MBA marketing class. The four P's of marketing are product, price, place, and promotion. And the big lesson here is that you're going to market every time you bring a change order to your owner or to your general contractor as if you're the subcontractor. That's going to market. There's an exchange occurring.

an economic transaction, you got to pay attention to those four Ps. Where are you having the conversation? Are you having it walking with them to get coffee? Are you having it over email? What's the right condition in terms of the place to have that conversation? Do you want to promote that change order to them and say, hey, this is coming up, it's coming down the pipe, look for it in your inbox, or do you want to take a different strategy? The price, that's going to have an impact, obviously.

and the product. you describing this change order well? Are you explaining what you're selling to your general contractor or to your owner sufficiently? That's part of the product of the change order. That is your work that you're adding on top.

Dee Davis (1:08:05)
Yeah, and I just want to add for all you subcontractors out there, learning to properly price a change is of paramount importance to your career and to your company. I teach classes on how to price a change order. It is so important that you learn what is truly an impact to you and how to properly capture that and price it.

so that when you get to that change order negotiation table, you can describe your change, you can back your change, you can justify your change every single time. So you've priced it properly to cover yourself. And there are guides out there for the mechanical contractors. It's called the MCAA change order guide. It gives you details of how

to price a change and all the different things that you may not think about readily when you're price. It's more than just the pipe and the duct on your project. It's are you using a scissor lift? Is it accessible? there's a hundred different things that go into it. And if you don't know how to price it properly, you're going to lose money at the end of the day. So.

From the owner's side, it's I'm looking at it like, hey, is this fair and reasonable? And have they priced this properly? From the contractor's side, I'm also looking at it like, hey, contractors, have you priced this appropriately? Did you take into account all the factors that are going to impact your ability to get this work done at this stage of the project? And did you really think about all the pieces? Did you really think about

Are you on a ladder? Are you on a scissor lift? Are you having to weave up in between different systems to reach this? I've got to go drill an insert in and we're three quarters the way through installation. Are you even going to be able to access that? How do you do that? Are you going to be doing position welds? These things are really, really important to making sure that you are pricing the change properly. So

If you need to learn how to do that, give me a call. I definitely teach owners how to do this stuff from their side and I teach contractors how to do this stuff from their side. It is so important that you learn these things so that you make sure that you are being the best project manager or project engineer, change order wizard that you can possibly be for your position in your company.

Brad Wyant (1:10:27)
And to put a fine pin on that. Double jeopardy rules apply and change orders. If you submit a change order for less than you should have and you get approved for it, it's over. You can't go back. No backsies. This is just like a courtroom. There's there's no room to go again. You own it once you sign that change order.

Dee Davis (1:10:45)
That's a really good point. I'm glad you brought that up. Yeah, no backsies. I've had that happen before where I've had contractors come back and say, I really blew it. I left this out or whatever. You can always try. It doesn't hurt to ask. You better not make a habit of it. I can tell you that from the owner side. You better not make a habit of that.

If you've got a really good story and it's a one-time thing and maybe there's enough money to cut, mean, you can try, but generally contractually, no backsies.

Brad Wyant (1:11:16)
Hahaha

Dee Davis (1:11:16)
Well, thanks for joining us, everybody. We'll talk to you soon.

S1 E17 Handle Change Orders Like a Pro

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