Ensuring that you get your money’s worth for every change order you complete is vital to maintaining the success of your business and your cash flow. Yet we see many changes inevitably leading to payment disputes, simply because the customer decides to disagree with you about how much the change is worth or whether it should be included in the original scope and quote.

The key to avoiding this situation is to ensure that you value your change orders up front, using reliable methods, and clearly communicate the added cost to the customer.

Option 1: Schedule of Rates

A Schedule of Rates outlines for the customer how many units of measure will be required to complete their job and how much each unit of measure will cost. To put together a detailed Schedule of Rates you will first need to work out your desired Unit of Measure. Your unit of measure determines how you calculate the cost and value of your work. Depending on your trade, your unit of measure might be a rate per hour, per day, per foot/square foot/cubic yard, per ton, per room, or per item.

A Schedule of Rates is much more preferable than a ‘lump sum’ agreement, since it shows the customer the exact breakdown of the total change order fee and means that they can’t argue about the total cost later on.

Option 2: Quote by Quote

The Quote by Quote option is a highly recommended method for staying on top of your variations. All you need to do each time additional work or a change is requested is provide the customer with a new quote. You can base this quote on your Schedule of Rates and if extra work is still needed, your Schedule of Rates simply acts as the basis for additional fees.

If you choose to go with the Quote by Quote method, make sure that you get the customer to approve each new quote (and the change order scope) in writing. This will provide you both with a record of the agreement and will be critical in resolving any quarrels over payment.

Option 3: Cost Plus

The Cost Plus method of change orders is based on the actual cost of the materials or work, plus an agreed percentage. If you choose the Cost Plus option, you need to be able to show records of the invoiced costs you have proposed and the customer must agree that the costs are within the market rate.

If the Cost Plus approach works for you, you might also want to ask your customer to approve the suppliers you will be using prior to the commencement of work. This assures the customer will be happy with the fees proposed.

The Cost Plus option is great for avoiding payment disputes, since the cost/value of the items or work is detailed on actual records and invoices and the customer won’t be able to claim that you’re overcharging them.

This article was provided by Anthony Igra, General Manager, Contractors Debt Recovery. For more articles (and videos) like this visit www.contractorsdebtrecovery.com.au. Interestingly, contractors in Australia, use the term “variation” instead of “change order.” The terminology may be different, Igra says, “but as we know, the problems they face are all the same!”