How to avoid scope creep and change order failures
Failing to document and communicate the cost of changes to your jobs could be costing you hours of time and thousands of dollars. This week, we’re walking through the strategies you should have in place in order to avoid scope creep and change order failures.
Topics we cover in this episode include:
- What change orders and scope creep are and how they happen
- Best practices to manage change orders and scope creep
- The importance of establishing clear communication channels from the start of a job
- How technology can help you manage scope creep and change orders
- How to document changes on your jobs
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Rob Williams, Profit Strategist | IronGateESS.com
Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | McWins.com
TRANSCRIPT
[00:00:00] Rob Williams: Welcome to the Contractor Success Forum. Today we’re talking about avoiding scope creep and change order failures. So this is a– ooh yes. This is a very big subject, if you know what we’re talking about. If you don’t know what we’re talking about, stay tuned, because this is gonna be pretty incredible for you guys.
If you hadn’t dealt with it yet, you will. It comes up and it can cost you a fortune or ill will or something on the job site.
So, we have with us Wade Carpenter, Carpenter and Company, CPAs. And we have Stephen Brown with McDaniel-Whitley bonding an insurance agency. And I’m Rob Williams authoring the Pumpkin Plan for Contractors with IronGate Entrepreneurial Support Systems. And no, we don’t build iron gates. So don’t send me your RFQ. I still get those RFQs quite a bit. So, thanks. And we here at the Contractor Success Forum, we discuss how to run a more profitable, successful construction business. And one of those things is scope creep and change orders. Boy, they kick my butt.
[00:01:17] Stephen Brown: Sounds creepy.
[00:01:19] Rob Williams: It’s–
[00:01:19] Stephen Brown: Well, now the change orders sound good.
[00:01:21] Rob Williams: Yeah. Well if you bill for them, it’s not, if you don’t get paid for them.
[00:01:25] Stephen Brown: Yeah. Well, yeah, you gotta get paid for them.
Change orders vs. Scope Creep
[00:01:28] Wade Carpenter: We all pretty much understand change orders and when we don’t document them, there’s all kinds of times that people, they wanna change something in the middle of the job and they don’t get them approved and they don’t get paid for and, they end up costing a lot of money. Scope creep really refers to these gradual expansions of the scope of the project basically are drifting the scope. And by the time you’re done, it’s cost you a lot of money and a lot of times you don’t even recognize it happening to you. You know, it causes delays, increases the costs, sometimes causes tension.
So both change orders and scope creep can cost a lot of money. You may see this being the good guy on the project and you’re trying to accommodate everybody, but it may be the reason why you’re not being profitable every year.
[00:02:15] Rob Williams: Oh yeah. You know what? I really saw that when I started doing various jobs that were not in my wheelhouse with the people that I was used to doing business with for decades. When I went outside of my normal sphere of influence, it got messy. You know, the job specs. It was interesting how much is not in the job specs. Job specs will maybe tell you what you’re supposed to bill but it almost never says who does it.
[00:02:45] Wade Carpenter: Right.
[00:02:46] Stephen Brown: And it’s a little creep in here and a creep in there. It just creep. It adds up.
[00:02:51] Wade Carpenter: Well, if it’s okay, I’d like to give a little two minute story example just to kind of illustrate it. And there’s a thousand ways this can happen. But imagine you’re a general contractor doing a tenant buildout for, say, a landlord that is gonna be renting their office building to a business.
So, an architect draws up plans, contracts are signed, you’re the general contractor. We get started. We hire this framing crew on a time and materials basis and we get going. Your project manager’s not on the job. We’re, day three of framing. And so all of a sudden the tenant walks in and he starts seeing this taking shape.
And so he says, well, I want my office a little bigger. So can you move this wall 18 inches? Well that little 18 inches, you know, that’s fine. They were gonna finish up that day, but we gotta come back the next day. We gotta rip out that wall, reframe it. Well, they didn’t tell you, the project manager.
So you know, you get that done and you call in the electrical crew, they do all the electrical, and then here comes the plumbing crew. Well, all of a sudden the plumbing doesn’t fit where it’s supposed to fit. The fixtures are not gonna fit. And they give you two options. You can either tear the whole thing out and start over and lose all the money you put in electrical, or you can order some parts that are gonna be different, it’s gonna cost more, and it’s gonna take you a few more weeks to get it in.
Before you know it, you’re a few weeks behind schedule. At the end of the project, the landlord is pissed because you said you were gonna be done in six weeks. The tenant is pissed because they couldn’t move in and you’re pissed because you can’t get paid for all this extra work and extra cost you put into the job.
There was no change order. And especially some of the ones where, you have the tenant or the person built building a house or something like that. They walk in and just start talking to the crew and they may not talk to you. There’s any kind of number of ways, but that’s just a quick example of how something like this starts. You ever see that?
[00:04:53] Rob Williams: Many times. Many times. Actually that’s interesting. When you actually have a change. I think some of the scope of work that I was thinking of was just not having things defined, and it’s well, the blocking needs to happen for the HVAC or for some plumbing or something. The framer’s out here, he’ll do it.
Or maybe the framer’s not there, and maybe it was supposed to be the framer, but the plumber does it, or maybe you are– this was real case for me– maybe I’m building Arkansas State dormitories as the framer, which is almost a three hour drive, and my guys have got to go drive three hours to go out there to do a few blocks. And then when they’re there, then of course they’re gonna ask you to do a lot of other things and then they drive three hours, they drive three hours back. And then while they’re there, the superintendent has all this other list of stuff he’s wanting. They’re like, well, we’re here. Let me do that right now. I can’t get in touch with everybody because we don’t wanna drive three more hours to come do it again later. Let’s just do it. And then, you know, no, we’re not paying you for that. So.
[00:06:02] Stephen Brown: So beside taking that contract and the specifications and making sure your project manager has that in front of them at all times and is ready to communicate with the owner’s rep that this is gonna be a change order and you gotta come up with the cost for it track that. What else can you do, Wade?
[00:06:23] Wade Carpenter: Before we get into that, there was a couple other factors I just wanted to point out that contribute to the scope creep. Obviously we have people that will come in and say something to somebody on the crew on the job and they don’t know any better. They don’t know who they’re listening to. And they, they probably have good intentions.
But, I think Rob alluded to this part, like sometimes the project objectives are not drawn out very well. The contract is not very specific in parts. Sometimes it’s a inadequate communication between say, the project manager and their framing crew or their, whoever their subs are on the job.
Sometimes you may have your own crew in there, but they don’t understand their roles and responsibilities and the fact that, hey, you can’t just go make a change just because somebody walked through and said you should be doing that. I think scope creep causes a lot more heartache than we realize. We recognize like undocumented change orders you can’t charge for, but we don’t realize how much money’s going out the door for this.
[00:07:20] Stephen Brown: Right, in the bonding business, the first thing the underwriter looks at profit fades and want to know why.
[00:07:26] Rob Williams: Oh yeah, I think back on that Arkansas State job that we did. One of the requirements was that we had a supervisor on site at all times. So we actually had some crews that were staying up there, but then we had, our guy was driving all the way up and they extended the job, like one tiny little build out of a building. This garage, it was 1% of the job, and my guy had to stay there four extra months, the supervisory thing, and I was not knowledgeable enough to know how to turn in my change orders of, hey, you changed this schedule up. Because we asked him, you know, we gotta pay for the, and the superintendent said no.
And we’re like, well gosh, do we argue with these guys? What do we do here? And we just pretty much ate it. And that was a killer for us to do that one little tiny job on that scope because we thought we’d be doing it while we were there, then that was another, I guess you call that scope creep too.
And the other question, Wade, I don’t know if you consider scope creep material changes. Because I was doing that job turnkey. Material and labor, with all the things in there. And there was one line item that was specked in there of a product that didn’t exist on the market yet. I guess they had been talking to Hardiplank about getting this, so my guys picked this closest SKU. Back then there was no such thing as pre-painted Hardiplank. And this was the first job, maybe one of the first jobs in the country that used pre-painted Hardiplank. So that was a hundred thousand dollars different line item that we ate. So it was uh, job creep of the scope. Because it wasn’t even in any of the books or materials. It was like the first time it was used.
[00:09:11] Stephen Brown: That’s more like job slam instead–
[00:09:13] Rob Williams: Yeah, slam. That was not creep. That was like a gah, body slam!
[00:09:18] Stephen Brown: Okay, so you follow the contract and you have a good construction attorney. Guys, we always say if you have to look–
[00:09:25] Rob Williams: We didn’t do that back then either.
[00:09:27] Stephen Brown: If you have to look in the yellow pages for a good construction attorney, it’s too late.
[00:09:31] Wade Carpenter: Well, yeah.
[00:09:32] Stephen Brown: Some of our younger listeners don’t even know what the Yellow Pages is, but.
[00:09:35] Wade Carpenter: Right.
[00:09:36] Stephen Brown: Go ahead, Wade. I’m sorry.
Best practices to manage change orders and scope creep
[00:09:37] Wade Carpenter: Well, no, I think you’re leading into, the best time to do something about this is during the job. So let’s talk about some of the best practices to manage change orders and scope creep.
Establish clear communication channels
[00:09:48] Wade Carpenter: Establishing clear communication channels. We’ll say like your subs or your own people need to report these things up and you need to let them know that. But you know, if you’re going to have change orders, we need to document them very clearly and review them very thoroughly. And you should negotiate them fairly.
Sometimes there are things that happen and sometimes we’ll put a contingency line item, but don’t wait until the project is several weeks down the road to go back to the owner and say, we made this change because of this. I see a lot of times they’ll say, hey, just do this for me this time and I’ll get you on the next project. You ever heard that?
[00:10:27] Rob Williams: Oh yeah.
[00:10:28] Wade Carpenter: Yeah.
[00:10:29] Stephen Brown: Of course they’re, because if it’s like a federally funded project or it’s a public institution like the school, Rob, they only have a certain amount of funds to spend, but they try to limit that by putting it all under your contract. But these things change and you gotta let them know, you gotta pay for it guys. Or we just simply won’t do it. Sorry.
[00:10:49] Wade Carpenter: Well, I think that’s a huge thing to state. But after you started the work and then coming back and saying, we’re gonna do this, it’s a little too late.
[00:10:59] Stephen Brown: You’re right.
[00:11:00] Wade Carpenter: Just in the little story I gave, this wasn’t communicated to the project manager, but when there’s been a change, communicate that to the whole team.
So the plumbers know immediately we need to go start changing out something. And maybe it’s something that they had to order a long time ago, especially with all the issues with the supply chain in the last few years. Sit down every week and say what changed? Or refer back to the contract regularly and say, is this really in the scope?
[00:11:28] Rob Williams: It’s really interesting. We talked about, actually in the book, the Pumpkin Plan, we talk about the contractors picking your ideal clients and who you work with. I think one sign on there that scared us a little bit on that job site is when we got there, we saw other contractors just walking off the job, leaving those guys. Because the arguments and stuff, they’re like, they left early. They saw the writings on the wall and they’re just like, it’s not gonna be worth it to deal with all this because they’re trying to get us. And actually I’m a little bit nervous talking about this because I see that superintendent’s name on our following us, so I know he’s listening. So, we’re friends, you know, we go to the Mexican restaurant and eat and do it, all these things.
But boy, when it came down to the business side, he was in charge of that job and he did not wanna bring any additional expenses back to that office.
[00:12:17] Stephen Brown: Well, that was his job.
[00:12:18] Rob Williams: Yeah. That was his job. And even at the expense of these guys walking off the job and leaving and in high frequency.
So that was sort of a red flag, but also knew I needed that job at the time. That was when things were tough, like ’09, when , I needed that. So I kinda let that creep happen because I needed to keep, I didn’t have anything anywhere else to go. There were very little jobs going on at the time.
[00:12:43] Stephen Brown: Right. Well, and beside open communication, one of the best things you can do to prevent job creep is to really know your contract and know what you’re signing. Change it if you have to before you sign it. Get the help of your attorney. But if terms and conditions are not doable, don’t sign the contract. Just don’t.
But if they are doable and it’s an extra headache on you, then you’ve got to charge more for that.
Anyway, it is definitely there all the time. You want to keep customers happy. And of course, what a better way to do that than just giving them a little something extra. Louisiana, they call it laggniape, a little something extra.
[00:13:25] Wade Carpenter: Well there’s just a couple other points I wanted to talk about on managing them, and then we talk about like how to protect yourself a little bit.
How technology can help you manage scope creep and change orders
[00:13:32] Wade Carpenter: There is technology out there. Use the technology to your advantage. One of our earlier episodes, we had somebody on here talking about documenting your projects with photos.
[00:13:42] Stephen Brown: That was a great one.
[00:13:43] Wade Carpenter: Yeah.
But technology to, you know, keeping up with weather changes or whatever things that happen. We’re not really trying to get into like lien claims and bond claims and stuff like that, but these kind of things protect you. And if you can say, hey, he asked us to do this and this is what it looked like before, now we had to do this. The more you can document, the more you can go back and, establish where you were and your position on it.
Again, if something starts to go off track, pay attention to it. If something starts to go off track, bring it to the attention of the project manager. Don’t wait till things escalate and it becomes a problem.
[00:14:23] Rob Williams: Are there any tips on, how you go about getting those? When can you turn in a change order? When can you not? I think so many of the arguments were like, oh, it said in there. So you, I guess you just gotta start reading it and then arguing if it’s not spelled out in there. A lot of the times the job specs are not specific enough.
[00:14:44] Wade Carpenter: Yeah. I–
[00:14:46] Rob Williams: And sometimes the plans are just wrong. I don’t know if they’re as wrong as they used to be back in the day. Now you’d think AutoCAD everything would be right, but no, they weren’t with us. But you’d–
[00:14:56] Stephen Brown: Well, you know, that’s the owner’s fault if they didn’t draw it up right, you gotta point that out to them.
[00:15:01] Wade Carpenter: Well, to be fair too, in construction, sometimes you’ll get in there and something else needs to be done, nobody thought about. If you’re doing a rehab or something like that, you discover things later.
How to document changes to the job
[00:15:13] Wade Carpenter: How can we document this? Best practices here. Use a standard form. I would always suggest you use the AIA American Institute of Architects, I think it’s the G701 form. But even if you don’t use that, use some kind of similar form. It just says, this is what it was and we agreed to it. Get it signed. A verbal change order means absolutely nothing. I think a lawyer would tell you that all day long.
[00:15:37] Rob Williams: Wade, on some of these jobs that I talked to, the contractors told me, particularly the government job examples that we were talking about, is they said they would bid these things for just about free, and they made all their profit on the change orders. I did not know how to play that game, but when I heard them talking, I must have needed some lessons from them because I certainly didn’t do that.
I guess they were relying on bad documentation and bad plans. I never played that game and it was interesting for me to hear people say that’s the business they’re in.
[00:16:11] Wade Carpenter: Well, I’ve heard that from other contractors as well, but there’s also situations where this scope creep thing, and maybe we have a better word for it or whatever, but a lot of times we’ll say, well that’s, I put this contingency line in there. Well, that doesn’t mean you necessarily should have used it because it may not be your fault.
If it’s something they requested, they should pay for it. But as far as like documenting the stuff, you know, be detailed about the change. Be specific. As I said, get it signed. Keep the form with the contract stuff. We’ve had some that have said, well, we got the change order signed, but I can’t find it.
[00:16:48] Rob Williams: Oh.
[00:16:49] Wade Carpenter: Can’t find it, it does no good. And as I said before, communicate it to the whole project team. If they don’t know you changed something, well there’s gonna be other things that affects down the road.
[00:17:01] Rob Williams: And Wade, I guess the change order form, you say get a standardization so it has the items that you need on there. Because I know our change order forms, we had a little PO book, that just, you just wrote it physically. There was no form. It was a form because you had the little carbon copy things, but it was just a page of lines: name, fill in whatever, you can sign here.
But there was clearly no form of wording.
[00:17:29] Wade Carpenter: Yeah. Well, again, be specific. I think we already brought up to document it with pictures, but that can go a long way to explaining what happened on a job. So I’ll always recommend doing things like that. But any kind of evidence you can provide and say, this is what happened. You’re the one that came in here and told me to move this wall and this is what it caused.
[00:17:56] Stephen Brown: Then they’ve got amnesia. That’s–
[00:17:58] Wade Carpenter: Yeah, exactly. But.
[00:17:59] Stephen Brown: Well, a picture is worth a thousand words and that’s why that podcast we did with your friend and customer that does that was just a amazing in the detail and how he had really studied and worked out the mechanics of documenting what goes on on a job site and being able to tie those photos and video of each job into the job cost.
[00:18:23] Rob Williams: Yeah. That must be valuable for all these different services to be forming whole businesses around just how to file your pictures. I don’t know how many services I’ve seen that they’re building the whole company around how to file those job site pictures.
[00:18:37] Stephen Brown: Well, he figured it out and wrote the software himself.
[00:18:40] Rob Williams: Yeah. Yeah. He, yeah he in-house designed it.
[00:18:42] Stephen Brown: Like you Wade in those early construction accounting software.
[00:18:46] Wade Carpenter: Well, I do remember when he was talking about that he required his crew to take at least six pictures every day before they left the job. And just, that’s standard policy. It gets done.
[00:18:58] Stephen Brown: Would they just do selfies at the end of the day?
[00:19:01] Rob Williams: Yeah.
[00:19:01] Wade Carpenter: Yeah.
[00:19:02] Stephen Brown: No, you’re–
[00:19:03] Rob Williams: Yeah. He actually did say because they don’t know what they’re taking a picture of because they don’t know there’s a problem when they’re there. It’s not till later. They have no idea what in that photo is gonna be used. And we actually, even back in our day, we would buy all these digital cameras, these just little silver cheap cameras right when they were invented right after film and we’d just throw them in a box and I think we had the shipping department. We had a box of those. And then since we were also computer programmers, we were programming things in our construction company. So we just, I don’t know what the heck they did. They took those little disks out and store them somewhere. But we had, I’ve still got boxes of them in my attic at home of those cameras.
So it–
[00:19:46] Stephen Brown: That’s a sad story. But back then that was state of the art
[00:19:49] Rob Williams: It was, we thought we were like–
[00:19:52] Stephen Brown: Technology and data storage is so cheap. You could literally keep a video camera running on your project 24/7 if you want to.
[00:20:00] Wade Carpenter: Yep. Well, I, I guess you brought back some memories on talking to Chad about that thing, but I remember his story about, he had an issue where, they had ended up messing up the floor. They had a picture of the floor and they had the actual picture of the superintendent walking across the floor, but then they–
[00:20:19] Rob Williams: It was all shiny, right? It was shiny in the–
[00:20:21] Wade Carpenter: And, yeah. And then they came back and wanted them to send a crew out there on a holiday weekend to fix it like it was supposed to be. And it turned into a change order for him because he could prove that. But I always thought that was a great story that he gave. But–
[00:20:36] Stephen Brown: It really was.
[00:20:37] Rob Williams: Yeah. And the interesting thing, I can’t remember the detail, but you knew from the story that the superintendent was lying. It wasn’t a, an oversight. He knew that it had been done. I think it was some story like the superintendent had put the mantle up or something and–
[00:20:53] Wade Carpenter: Yeah. Acid washing the brick
[00:20:54] Rob Williams: Or yeah. That’s right. They cleaned the fireplace and it ruined the floor. That’s right.
[00:20:58] Wade Carpenter: Yeah. But anyway, I know we’re going a little long on this and I know we still working on our term with the creep stuff, but.
[00:21:05] Rob Williams: But I think that point is the theme when I get is the superintendents are not your friends many times. They get those change orders because you’re friends with them when you’re out there.
Well, like maybe some of them you’re not. It might be better just have an asshole for out there. It might be better. Cause then you’re not fooled by being friendly on the job site.
[00:21:25] Stephen Brown: Oh, that’s a pessimist look on it.
[00:21:27] Rob Williams: I’m, hey, it’s just reality, man. It’s reality.
[00:21:31] Stephen Brown: Well, you can always goof off and go hunting with them and stuff.
[00:21:34] Rob Williams: Yep.
[00:21:35] Stephen Brown: Just literally change hats, with your friend. But you’re right. It’s what the contract says. And that’s a great point, Rob, because a good contract keeps you friends. That’s just a fact. Spend more time on the get go.
[00:21:48] Rob Williams: Yeah. Some of that when you’re talking about picking the contractor itself, we, when we were the contractor, we ate tons of this, but I had friends, good friends of mine that when the superintendent had a back charge, he took it outta his pay. He took it outta the superintendent’s pay. So some of these guys, man, it’s coming out of that superintendent’s pocket, saying it’s his fault and he gets back charged for that.
I don’t know that we could have kept any of our superintendents if we had done that to our–
[00:22:16] Wade Carpenter: Well, making them responsible for these change orders and that kind of stuff. I’ve seen holding bonuses, you know, accountable for stuff like that.
[00:22:24] Rob Williams: Yeah. Well now withholding, but now we did have a thing, the bonus would be reflected of the cost and stuff. So we had factored in there, but we didn’t take it out of their check.
[00:22:32] Wade Carpenter: Yeah. Well, I know we only scratched the surface of this one too, but the only point I meant to bring is I don’t think contractors realize how many dollars profit they lose every single year because they don’t address these properly. They try to be a nice guy or whatever, and then, just reminding me, you’re in business to make money and you’re in business to feed your family. So I guess that’s all I really wanted to point out today.
[00:22:59] Stephen Brown: Well, that’s a great point, Wade. Thank you.
[00:23:02] Rob Williams: All right. Well, that’s why we’re here. We’re here on the Contractor Success Forum to figure out how to run more profitable, successful construction businesses. So, and with us again, we have Wade Carpenter, carpenter and Company, CPAs. And we have Stephen Brown with McDaniel-Whitley Bonding and Insurance Agency.
And I’m Rob Williams, the Pumpkin Plan for Contractors author in the works and PumpkinPlanforContractors.com, it’s one way to go there. And we have Contractor Success Forum dot com. So go follow us so you can listen to us on YouTube now and any of these podcasts, there’s so many different things. I’m getting other people–
[00:23:42] Stephen Brown: Including the one we were just talking about, about the documentation on the job site.
[00:23:47] Rob Williams: Oh yeah.
[00:23:48] Stephen Brown: Scroll through our podcast.
[00:23:49] Rob Williams: Yeah. What’s his–
[00:23:50] Stephen Brown: One of the early ones, guys.
[00:23:52] Wade Carpenter: His name’s Chad Gill.
[00:23:53] Rob Williams: Yeah, Chad Gill. So look up Chad Gill on there and search for that. We’ve got a hundred episodes or so now, so, we’re gonna have to start filing and sorting these things into categories because we have such a vast information of knowledge.
[00:24:05] Stephen Brown: Or else we’ll get podcast creep.
[00:24:08] Rob Williams: Podcast creep. That’s right. Or just creepy podcasts. I don’t know.
[00:24:12] Stephen Brown: One or the other.
[00:24:13] Rob Williams: The creeps on the podcast. All right, well thanks a lot for visiting us and contact us and let us know what you want us to talk about if you have any questions that you want three guys to give crazy bad answers that we just make up or we might actually even know the answer.
So, appreciate you guys and come back and listen to the next Contractor Success Forum.