Change Orders and Expendable Margin

Posted by Michael Leonard on Sep 27, 2018 11:51:40 AM

Change orders. An unfortunate everyday reality for exterior remodelers, change orders can impact everything from project logistics and timeframe to profit and customer satisfaction, and are essential to profitability. Effectively tracking them can mean the difference between consistently healthy margins and occasional (or even frequent) losses.

Exterior remodelers especially can encounter situations requiring change orders—even on the simplest of jobs. Unexpected damage, shoddy carpentry, poor underlayment or weather proofing and other factors can quickly add up to a sizeable and unexpected change to the original scope, schedule, and cost of any project.

Another reality for remodelers is that change order processes are often complex and time consuming. While change order management is usually explicitly laid out in contract nomenclature (and even deemed as “expected”), crews will often simply forge ahead to ensure a project stays on track, forcing the contractor to absorb the unapproved changes in the margins line. After all, there are schedules and revenue targets to meet. Who has time for a big change order delay?

Preserving Expendable Margin

Failure to account for unforeseen labor and costs puts one of your most crucial business growth components at risk—expendable margin. This is the portion of job margin that doesn’t go to covering office costs, insurance premiums, marketing and advertising, etc. It’s the portion of margin that can be applied to building the business by purchasing new tools, vehicles, estimating resources, and so on. This final 5% or so of margin can often be the difference between a business that stays stuck in a revenue rut, and one that gradually but consistently expands and grows.

To demonstrate the importance of preserving expendable revenue, let’s look at two different scenarios. In the first scenario, the contractor only preserves 1% of their expendable margin, the rest being absorbed into uncovered change order costs. In the second scenario, the contractor preserves a more complete 5% of their expendable margin by carefully monitoring change orders and charging for all of the work their crew is doing:

1 expendable margin


 5 expendable margin

With all other things being equal, such as total revenues and a steady 20% hard margin rate (margin used for ongoing business costs not associated with labor and materials), the contractor carefully monitoring for change orders sees a nearly $20k greater expendable margin. This contractor will be able to replace aging vehicles, buy new equipment for larger jobs, and look at new tools and apps to enable greater estimating and sales efficiency. Scale this benefit across an entire year’s worth of revenue and the contractor preserving 5% of expendable margin from better change order tracking will see major dividends.

How to Get Started

There are a few immediate steps a contractor can take to ensure they are accounting for change orders properly and protecting that vital expendable margin. 

  1. Clearly Define "Changes" Upfront: The agreement with the customer should clearly outline what constitutes a change to the original scope, schedule, and cost of the project. The contractor or onsite supervisor should carefully review this part of the agreement with the customer to prevent any misunderstandings or challenges once the job begins.
     
  2. Gain Buy-In From Your Crews: All of your workers should understand the importance of change order tracking and be knowledgeable enough about the particular job to recognize circumstances that might require a change order. Consider creating some sort of incentive program to further encourage them to carefully account for changes. A company party, fishing trip, or other fairly economical incentives can be a great way to not only build comradery, but also incentivize your crews to hit the next quarter's expendable margin targets as well.
  3. Create a Consistent Change Order Process: Outline a simple, easy to remember process for change order management. From workers to site supervisors to owners, make sure everyone knows who needs to do what regarding estimates, sign offs, approvals, and so forth. 

  4. Employ Tools and Apps to Help: While traditional change order management systems were considered complex and time-consuming to deal with, there is a host of new tools and mobile apps available today that remove time and effort from the equation. Many of these will even sync with your preferred vendor's materials lists, and can quickly adjust labor rates and other factors on the fly. 

Turn Challenges into Opportunity

Effectively managing change orders has to date been a considerable challenge--one that has often resulted in absorbed costs and loss of expendable margin. Taking the time to establish consistent processes and look at new tools can help any exterior remodeling contractor ensure they are being paid for all the work their crews are doing in order to maximize profits and grow the business.

To learn about the Go Figure app and its role in helping to exterior remodelers manage job processes, visit www.gofigure.build.

Topics: change orders, exterior remodeling, margins

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