Establishing a Change-Order Policy
Personally I hate paperwork, and the cost of making a change order often outweighs the cost of the change. For example, if a customer wants to change hinges on a cabinet from 120 D to 170 D, I would normally do this as a matter of customer service and not mess with the hour it would take to write the change order, track the customer down to have them sign it, discuss with the customer why two hinges cost $50, etc.
Also, if a customer wants to change a cabinet from a pair of doors to a drawer bank, I would not normally consider this a change to the scope of work, provided the change is made before any work has been done.
I don't like being nickel and dimed, and I prefer to not do that to my customers. And I try to account for this by having approximately 10% in my budget for contingencies. But it always seems that the customer ends up with the better end of this deal. Mostly in the time we spend talking about whether the cabinet should have doors or drawers, or talking about any of the other thousands of details that can be discussed on any job.
It seems from a profit perspective it would be best to meet with the customer, make a layout/design, meet again to red line, and any changes that are desired after that would require a $200 fee to write the change order plus the cost of the change, whether it's changing a drawer from 4" to 4 1/4" or whatever.
I once heard of a homeowner deleting two doors in the basement of their house that was under construction and then getting a bill for the change to the scope of work. Nothing had to be done by the contractor, just don't buy or install the doors. But it was a change so he sent them a bill. It seems that many contractors make their profit margin from change orders. They go in with a low bid, then comb the plans and job scope for any and all changes. This is not the way I want to approach jobs, but I think I'm missing out on potential income.
I find more and more folks don't like things to be simple. Why? I think it's because simple things are hard to screw around with and when someone has the intention of beating you at the end of the job, they can't.
If your client wants better hinges, get your money as an upcharge on a separate bill due at the time of upgrade, and forget about change orders. Also, if a client degrades the job, then credit them accordingly.
From the original questioner:
What if balusters A and B are both $15? On Monday the wife says she likes baluster A. Then you get a call on Tuesday from the husband who says he likes baluster B. They decide they need to run this by their interior designer, who five days later comes up with baluster C which is still $15, but you have to order it through a supplier you don't know, and they want to see all three side by side so they can make a final decision. Or even worse, what if baluster C is $.50 cheaper and they want you to give a price break, but you have spent 3 hours in phone calls between the owners, designer, and suppliers?
From contributor M:
I struggle with this, too. The purpose of a change order is two-fold, as I see it. First, it is to clarify what is to be done. What is added, what is deleted, and how much additional time and money will be required. The second reason is a deterrent. It is punitive, so that the client will say, "Do I really want to change this if it is going to cost me this much money just to talk about it?" You are actually training your client to see your time as valuable. If you build in 10% without the client's knowledge, then in their mind, they have received 10% of free labor and materials. What happens if the changes total 15%? You now have to either change the way you do business with them or eat the cost.
I have long since stopped trying to be a good ole boy with my clients. When they chum with me, it is because they want something that I have. Rarely has a client invited me to do something social with them after the job is complete. That's fine, but it verifies my hunch that the reason they were so nice to me was that they wanted something for nothing, and they thought that by being nice to me I would give it to them. Well, I have tried that with attorneys. You know what? It doesn't work. In fact, I got charged while I was being chummy. These guys don't work for free! Why should we?!
Have you been watching the 'Dog Whisperer' on National Geographic? This guy goes in to a bad situation with an out of control dog, and within minutes the dog is calm and submissive. In short, he works with the dog in a way that they understand, and then he trains the people to do their job. The dog has been calling the shots and the people throw their hands up wondering why they cannot control their dog.
Well, in the same sense, I expect the client to take as much as I will give him. They can fuss for months about the color not being exactly right. And as long as I rework it for free, they will continue to allow me to, and in many cases, not pay the bill. But when they realize that the rework will cost them time and materials, and even a set Change Order Fee, they are way less critical and even pleased with what I have done.
Don't get me wrong. If I made a mistake in color, or something else, it is my responsibility to change it at my cost. But in today's culture, clients can smell a freebie a mile away. It is your job to train them in the fact that you are a For Profit Business, and that you will be paid for the work you do. Yes, it is your responsibility to convey this message, and stick to it. Change orders are a great way to instill professionalism and help them to value your time.
When you tell your client that each change, no matter if work has already been done or not, will be an automatic $100 plus time (including consultation with them and other contractors, drawing revision), materials and any applicable restocking fees, then they will be less likely to wreak havoc on your schedule and bottom line. I tell them that I am sure that they want to have their project started and finished on time. A way to do this is to impose a fee for changes. This helps people make a plan and stick to it. When you go making changes, it disrupts everybody's schedule. This is your way of helping them stick to a schedule.
From contributor H:
I had situations like that arise early in my business. We eliminated some of it by having samples on hand. I know you can't keep samples of everything you use.
If the parts are the same price and they change afterwards... I tell them that there is no charge by me, but the supplier will have a return fee + shipping that needs to be paid for in advance. Almost every time they decide to keep what they have.
As far as the wife showing the husband, showing the builder, architect, interior decorator, etc… We do not put any work into production or order anything without the end user knowing what they are getting and approving it.
It's frustrating at times. When all the change orders and extras come in at the end on the final bill... that's when the trimming of our profits start. Whether it be by builder or homeowner, they will try to get us down. That's why payment at the time of change is great. Especially for the small things. Major changes you will get paid for, but the rest are always a battle at the end.
From contributor T:
While I can agree with the straightforward logic of contributor H's and M's argument, I disagree somewhat with the conclusion, at least in the case of direct sales to the homeowner. If it is a general contractor, I would say stick it to them every time they blink. You are just a vendor to them. I have never met one that was not bashful to ask me to take a bullet or fall on my sword in order to enhance their general welfare. I could retire now if I just had a dollar for every time they tried to explain how a rising tide will float all boats.
Homeowners are different. You have an opportunity to be a waterfront hero with these guys, a friend of the family. Their agenda is so easy to understand and fulfill that there is no reason for you to not be gracious. They won't expect you to give away the farm, but they won't appreciate being nickel and dimed, either.
I can remember staying at the Hilton Hotel next door to the woodworking show in Anaheim. It was 7:00 in the morning and we were all kind of hung over, hitting the lobby looking for breakfast at the same time. The restaurant, however, was full. There were not enough tables to feed us all at one time. We were all business people and we understood the concept of lead-times. If this would have been my hotel, I would have greeted everybody at the elevator, explained that there would be a bit of a wait, then offered us a free cup of coffee, croissant and a newspaper. The Hilton policy was to have us form a line in single file to pay $1.75 for a sour cup of coffee in a Styrofoam cup. I had no quarrel whatsoever with the $120.00 for the room. I did, however, object to being asked to pay for that cup of coffee. I never went back to the Hilton again and here I am telling you this story ten years later.
I say treat the customer the way you would want to be treated. The money you lose in small change orders is money you won't have to spend on advertising later. Seventy percent of my business is referred to me by former customers. I can usually charge a little bit more to a referral customer because I know they have already pre-selected me.
Think about the really great shopping experiences you have had and how seldom you have had them. Consider some of these extra strokes as one of the services you will provide and include them in your initial price. If you have to give away something every now and then, it will probably average out to your benefit. Without a customer, we don't have a business. There's probably a bunch of other ways we can get the money back… Lean manufacturing, for example?
From contributor K:
Funny, I agree with all three guys to one extent or another. As with all of them, we have struggled with this also, but we put an end to it years ago.
The way we handle it is simple, set the expectations upfront. When signing the deal, included in the agreement, and one of the items which we have them initial, is that any changes to the agreement will be in the form of a Change Order. For remodels, it clearly states that once the project has begun on-site, any and all Change Orders are to be Paid In Full. For cabinetry only, once the drawings are signed off on, any and all Change Orders are to be Paid In Full. Delays in payment for Change Orders may affect the timetable for your project. Now, it also states that if the value of a change is below $200, they will receive a bill only detailing the change, and any questions regarding the change order details can be addressed by calling 1-800-XXX-XXXX; if it is above $200, a separate Change Order and customer signature/approval will be required prior to the Change Order being executed.
We also have a little brochure we send to every client who signs with us, along with the Thank You letter (thank you card is separate with fridge magnet), which provides the expectations (and includes Change Orders), what they can expect, what we expect, upfront, so it doesn't become an issue. It also states that if they have to arrange funds or transfers, etc., that it be done prior to our arrival. It is also one more contact, making them feel comfortable that you are on top of things.
For remodels, we have the following progress payment schedule:
Doors get hung on the last day (to protect us against any nutcase, and to provide that "Wow" affect for the customer and end the transaction on a positive note. Puts them in a better mood when filling out the evaluation form, also... 8^) No check, no doors. Take wife and kids out to dinner.
Unless it is something more than a ding or scratch, which would affect a customer from installing their cabinetry, any moving damage will be treated as a service call under warranty coverage. Warranty coverage begins upon the receipt and cashing of final payment.
If you follow this format, you will find, as we did, that this will remove 99% of your payment issues. With regard to Change Orders/Freebies, rather than give it away, because of too much footwork for a $50 - $100 upcharge, simplify the paperwork, and just bill them, but don't give away your money that you could use on your family. If they've been a great customer, there's nothing wrong with giving them a parting thank you gift or even money, for that matter, which would be great advertisement for their warm market. Just be sure it isn't cash, so it can be written off.
If you look at it as money being taken from your family (which it is), it becomes less tolerable. As Ben Franklin said, "A penny saved is a penny earned." The key to all of this is setting the expectation upfront.
From the original questioner:
Thanks for the excellent responses. Is the purpose of the change order, or the threat of a change order, to slow them down in making changes? Sometimes I think life would be much easier if we could just stick to the original plans. But from a profit perspective, if they want to turn a $20,000 job into a $30,000 job, then that's a good thing. I don't necessarily want to discourage them from giving me more work. The biggest problem here is the trouble it causes with schedules and work flow, but if I can learn from contributor T and have a lean, efficient system, then that shouldn't be the problem.
It seems that in many businesses the profit comes from changes or additions. Cars, for example. The thought of being a car salesman sounds slimy, but up-selling seems to be a key component to many sales strategies. And many or most customers seem to up-sell themselves. At least with homeowners. Project details and quality almost always escalate. The trick is to be sure that this additional work is a profit generator, rather than a problem. The scheduling issues could be more predictable if there is a pattern of how much customers typically change through the course of a job.
From contributor S:
Ok, now I'm confused... Most shop rates quoted on this site are in the $65 to $90 per hour area. Why would a change order have a $100 to $200 fee for doing paperwork? At that rate, I am selling my saw and buying a computer and printer.
Could it be the nickel and dime routine? Seems like it to me. Everyone who deals with the building trades knows that the quoted price is frequently a low ball to bet the job, with expectations of making the profit of changes and items forgotten on the original bid.
Remember that item called "good will"... customer referrals? If I can make a change that will make my customer go away with a smile on his face and it costs me nothing, I am happy to do it. I hear the term "high end custom" here a lot. To me, that means you have to be a little flexible, hold the customer's hand now and then, and as a smart businessman, you have already compensated for this in your pricing. I read about some of you guys getting $40K for a kitchen; I'd be embarrassed to try and nickel and dime them for another $100 because they changed the style of the hinges before I even started working. Why would you want the possible confrontation and hassle for what amounts to less than 1/4% of the job? After 40 years in business, you learn that the bottom line is not the only factor.
From contributor J:
There's a lot of good advice here which once again goes to show how everyone has their own way of doing things. There does not necessarily have to be a right way and a wrong way.
I get most of my business by word of mouth and I do maintain a friendly relationship while working with my clients. Everyone wants to feel they are getting a good deal and if I can throw in a couple small extras that don't really cost me anything, why not?
I add 15% to my materials and that will usually cover anything minor (like a couple of 50 cent hinges). If it's major, I'll redo the invoice if I have not started work yet, or if I have started, I will make a change order. No charge for the actual change order, just the cost of the extra work. It takes me about 15 minutes to make up the paperwork and I'll have them sign it at our next scheduled meeting.
Generally, things like whether a cabinet should have doors or drawers will be worked out before any work has started. This would fall under design time and should be accounted for. If it's changed after starting the job, it will most definitely be a change order as the drawer base is much more expensive for me to build. Of course, I'm still at the early phase of my career, at just over five years. My opinion may change when I hit that twenty year anniversary!
From contributor A:
I have been thinking of starting to charge $100.00 for a change order when I have to climb back in the truck and go meet a customer. The charge is not for the actual change but for the drive out and meeting time. If they come here or I don't have to go anyplace, or change any plans to speak of, I waive the change order charge. At least that's the plan. In reality, I just want to stop the time wasting meetings that I get called to and nothing gets changed.
From contributor K:
Contributor S, I don't see how you *don't* see how a $100 - $200 charge is appropriate. Average trip to a customer's site is a half hour to an hour both ways. It's usually a half hour to an hour in the house greeting, answering questions, getting paperwork signed, etc., so using the numbers you provided, an hour visit would work out to $130 - $180 including travel time. You are looking at a $40K job as if you actually made $40K. If you look at charging for your time, instead of giving it away, affecting your cash flow and profitability, you will have one less drain on your bottom line, which can lead to service issues for other customers.
You are right - the range of shop rate on this site varies from $65 - $90, and in my opinion, it is too low in most cases, which is why you also hear how much cash flow is always such a problem (and yes, we've had our problems over the years). While I agree it's not always about the bottom line, this overlooking of charges that are legitimate is in direct correlation to what the "nickel and diming" customers can do to *your* bottom line, by you not charging for visits. If you give them an inch, they will take a mile. It is not one customer, but all customers throughout the year. Multiply 20 customers by one of these visits, where you don't charge for it, and guess what, you've just worked a whole week for free, and given that money to the customer and taken it away from your family. If you want to give a week away, travel down to the Gulf and give it away... at least you did something for someone who needed it, as opposed to someone who is paying you, not just for your product, but for your services and expertise.
Some guys charge an administrative fee upfront in their pricing, but if it is not utilized, I hardly doubt it is refunded to the customer.
In my opinion, if you are in business for yourself, you should draw a six-figure income from your business. Investment, risk, stress, payroll, business matters aside, you are a professional, and for someone in business for 40 years, such as yourself, your knowledge and expertise should come at a premium.
When you go out for a service call, do you charge a trip visit? If not, what do you do if it was for something that ended up not being covered under your warranty? If not, 1-2 hours of your time is gone, that you can never get back, not to mention the affect on the profitability of the job, as you will have to pay for the gas, as well as your time.
I have nothing against good will, etc. but more often than not, it is easily forgotten, and you are better off giving them a thank you gift, or a $100 gas card at the end after they have paid their bill in full and were a good customer. It will be remembered more and leave a lasting impression than not charging for your time.
Another way of looking at this is, you do a great job for them, with meticulous work, going above and beyond. Do the customers pay you more than the contracted price as a demonstration of good will? Yeah, I know, they're the customer... That's right, they should pay legitimate charges and not expect freebies. Profit is good! Capitol drains on your bottom line is bad! You are professionals; be compensated as such.
From contributor J:
I don't disagree, but one thing to keep in mind is that due to the very nature of our business, we cannot realistically charge for every minute of our time. If I spend an hour meeting with a potential client, and then another hour writing up an estimate for the job, and possibly another hour going over the proposal and I don't get that job, that's three hours plus travel and gas that I'm not paid for. That's just part of the business. It just means that there has to be a percentage added to every bid to make up that time. I use the same method for change orders. Every job should have a profit margin if I price it out correctly. So, for example, if I take on a kitchen for 20k and let's say 15% of that is profit, $100 or $200 is not worth an extra charge, in my opinion. And even though I have not been doing this as long as some of you, I can say that the little extras do go a long way. I have never done any advertising whatsoever and am currently booked through the end of the year. All from word of mouth and repeat business from past clients.
But I'll repeat what I said in my first post - everyone has their own way of doing business. My way may not work for everyone, nor should it. If you're in a position where you get paid for your work and make a profit at the end of the year (and I assume most of us are), then you're doing something right. Regardless of what others think.
P.S. I give away about two to three hours a week just catching up on WOODWEB! If only I could get paid for that.
From contributor M:
Again, another good thread. We all have different styles of business relationships. You need to know that I am warm with my clients and they greet me warmly when I see them in other situations. (Unless they owe me money... deadbeats!). But I find ways to let the client know that they should not expect freebies.
Just today I talked to an older couple and he wanted a cheap price, then proceeded to ask me if I supplied dovetail cabinets. I found this to be a great opportunity to help them understand that I am in business to make a profit. If they wanted this feature, or additional pullouts, or whatever, it would cost them more money. I said this with a big smile on my face. We laughed about it. And they agreed with me. Every time the husband brought up something else, I looked at the wife and she said, "cha-ching" and we all laughed. They were trained, or conditioned, to associate my time with money. This is a good thing.
I also charge for an onsite consultation. I started doing this when gas was $3 a gallon. This is a great way to pre-qualify people. Are they really serious, ready to throw down some cash, or are they just curious and I am going to be their free entertainment for the evening? Again, this helps set up a response... When they want something from me, there is a cost associated with my time. And you know what? These are great referrals. Why? Because they know what to expect.
Those of you that are afraid that change orders, or even onsite fees, will effect your goodwill/referral rating, stop and think about what is being said about you. Yes, they say that you do great work. They say that about me, too. Good quality, timely, friendly, all the same. But they also say, "...and he will throw it in for free." When this referral comes to you, they are already expecting that they will be your next charity. My folks may say something like, "Just make sure you get it the way you want it the first time. He charges $100 every time you make a change." And yet, they still refer. Tell me how this is not a good deal?
If I have some moron that is decision-challenged, it is not my responsibility to coddle him at my expense. Chances are very good that he will know of their tendencies and that these $100 bills can add up quickly. Hopefully he will find someone else.
I used to give everything away. When it came to the end of the job, I got what I was looking for. I got my ego stroked. I worked hard for that. The money was nice, but I was really doing it for the recognition. That cost me a lot of money! Now I explain why it is fair to charge for these things. I talk about a "reasonable profit" and in the same sentence I say "fair to you and fair to me." People understand that. And they tend to see me more as a person with a family, a small business man who has made sacrifices to build them exceptional cabinets. I guess my market does not allow for as much profit as others, so I don't feel bad about expecting them to pay for what they ask for. It is not nickel and diming for me. To me, it is a matter of responsibility and respect.
From contributor K:
Well said and thought out. Pretty much dovetails what I am saying: You are professionals... be compensated at such. By not charging, you are leaving all the control and expectations on their end to get freebies (again, I am not saying that goodwill does not fit anywhere into this). Freebies set the wrong expectation and can cost you more with any referrals you might receive as they are expecting it. A thank you gift of some sort, at the end of the job, after all monies are received, is an unexpected bonus to the customer, and leaves a great taste in their mouth.
The comments below were added after this Forum discussion was archived as a Knowledge Base article (add your comment).
Comment from contributor I:
Additionally, we identify the hourly wage rate of each class of workmen and office personnel and the principal. Each priced-out SMD has a line item, SMD preparation, X hours at Y per hour.
Our fully equipped skilled workman goes out at $82.50, portal-to-portal plus the vehicle at $0.85/mile - semi skilled and unskilled at a lesser rate. Our office staff is billed at $65.50/hour for SMD prep time. And lastly, I bill my time (as principal) at $135.00/hr.
When we sign a contract with a customer, we include a list of 'Standard Charges' and 'SMD pricing procedures as an attachment to every contract. (We have never had a customer fail to sign a contract, based upon these practices).
Now, all this said, we customarily do not charge for small changes. But when the change is significant, we can and do. Additionally, our foremen and crew leaders are given explicit instructions to do more than the contract says we must. Our repeat rate is excellent.
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