Five Steps to Stop Eating Costs on Remodeling Projects
As the owner of a professional remodeling or custom home building company, you know that the cost you put on the original contract for a client never ends up being the project's final cost.
Throughout the course of a remodeling project, clients will change their minds on fixtures or design, material prices will increase due to market demand, and unexpected site conditions will pop up on the jobsite.
All these things can cause the project to change from the original scope - and the original cost.
And while you can't predict or account for these changes at the onset of a project, you do know that they will drive the project's cost upward and further away from the price you quoted during pre-construction.
And if you do nothing about those changes they will impact your bottom line.
Three Things That Will Reduce Your Profit
Shouldering the responsibility for unexpected costs.
Costs from client changes or fluctuations in material prices and site conditions are not your responsibility to bear and should be passed on to homeowners.
Spending time on changing work.
You have a finite number of billable hours in a week. That means the time you spend adjusting and managing change requests takes away time you could be billing other clients for new work.
Not passing the costs incurred on to your clients.
Charges for materials, labor, and time spent on additional work or changes to the original scope of a project need to be passed on to the client quickly and efficiently so that you can still complete their remodel and profit as you deserve.
Getting Paid For All Your Billable Time
Whenever you have to pivot away from the original project scope your clients agreed to, you're going to end up spending a lot of time doing behind-the-scenes work, like coordinating with vendors and trades, pricing out materials, and adjusting schedules.
Not to mention the time spent presenting and explaining the details of these changes to your clients.
That's billable time you could be charging to other revenue-generating projects.
This means you need to be charging for that extra time you're spending on this project.
This is where change orders come in.
By implementing a change order process, you will:
Be compensated for the time you invest in pricing things out (even if the client doesn't move ahead with the change request).
Ensure that the additional costs incurred for that site condition don't come from the project's profit.
Add time to the schedule to ensure you provide yourself with a realistic timeframe to complete the increased scope of work.
Five Easy Steps
If you've been struggling to figure out how to implement change orders into your remodeling business, here are five easy steps to get you started:
1. Talk about your change order process upfront.
Clients don't like surprises any more than you do, so talking about your change order process early and repeatedly sets the correct alignment between you and your clients from the beginning. Use the pre-construction period to explain what change orders are, how you will use them during the construction process, and how additional work (items that fall outside the original contract) won't be completed until approved and signed by the client.
2. Get it in writing.
Most remodelers leave money on the table by approaching "extras" at the end, making it harder to recoup those costs and frustrating clients. Clients don't like the sticker shock of getting invoiced for a whole bunch of additional work at the end of a project when they've already committed so much financially. Issuing change orders as changes come up saves you from having uncomfortable conversations about project costs later. So don't delay issuing change orders to your clients. Do them early and often.
3. Don't miss out on project costs.
Use your project estimate as a guide when filling out a change order to ensure you capture ALL the costs associated with that change request, from the extra month of toilet rental to site supervision and beyond. Multiple things are impacted in order to execute a change request, and you need to pass those costs along to your client. If you don't, they come out of the profit from the job, which isn't fair to you.
4. Determine the added time.
Change orders need to reflect the additional time incurred. A lot of work goes on before the change order is even written, like sourcing product options, speaking with vendors and trades, pricing out the work, and adjusting the schedule to accommodate those changes. We also know that changes during the construction phase only increase time, not decrease it. Don’t fall for the mind trap that you’ll be able to complete the work inside of the same timeframe!!! That time needs to be accounted for - and charged for in your change order.
5. Get a signature.
Clients have short memories - especially when it comes to changes that will increase the cost of their project. Getting their signature on a written change order document or electronically through platforms like DocuSign, BuilderTrend, or CoConstruct is an acknowledgment by the client that they are aware of the extra costs that will be charged to them and the time that is added to the project - protecting you in the long run.
The Bottom Line
Despite all of the upfront work you might have done in the estimating phase of a project, things will happen during the construction process that needs to be accounted for in the overall budget to avoid profit bleeds. These are costs you're going to have to pay, which means you need to issue change orders to pass those costs on to your client and ensure you aren't paying for these out of your profits.
Having a conversation about and executing change orders may feel uncomfortable. But not nearly as uncomfortable as not being able to run a profitable remodeling business that supports your family and rewards the team that's worked hard for you all year with a well-deserved bonus.
If you're looking for more information on implementing a bullet-proof Change Order Process, click here to book a time to chat about the Build and Profit System.
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