Most project owners think change orders are a pot of gold for contractors. In situations like hard-bid public projects, they are the way contractors make profit on jobs that would otherwise be losers. But, that is a subject for another time and place.
When a custom home builder negotiates a win-win contract with their customer, every change order costs more than it is worth. I realize this statement might be hard to swallow, so I had better explain myself. The way we structure our contracts, change orders get the same percentage markup as does the whole project. So, if we agree to a blanket fee percentage for a multi-million-dollar project, a relatively small change, no matter the reason, can’t possibly be worth the small incremental increase in the fee. Of course, there are assumptions behind this statement; the changes are really not oversights, the extra costs presented to the owner are accurate, any credits due are considered, and the owner is given the opportunity to mitigate the extras as they come up.
Another way to look at change orders is by their source. Anyone from a building inspector to the owners’ daughter can start one. The classic reasons for change orders are; unexpected project conditions, building code interpretations, design team revisions, and owner “ah-has” (or “uh-ohs”). The first two are usually discovered early-on and are not very satisfying to anybody. They must be dealt with but provide little immediate pay-back. Long term, they might protect the property from harm.
Design team revisions, sometimes couched as clarifications, are often divisive. The owner is put in the position of mediating a disagreement between their designer and their contractor on whether or not something should be “reasonably inferable” from the documents, a task they are totally ill-equipped to take on, not to mention the emotional toll it can take on the team relationships.
The changes an owner generates can be the most problematic. Partly this is because owners may not perceive them as changes, rather as clarifications of what they meant all along. In those situations, architects and luxury home builders in Napa and Sonoma must be careful not to blame their customer for a failure to communicate.
In the final analysis, there are real costs for these deviations that come out of somebody’s pocket. Deciding what is fair requires grace and diplomacy.
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Jay True, former vice-president of JMA, became partners with Jim Murphy in 1987. In 2015, Jay and his wife Elaine True, our office manager, retired from JMA and moved to Michigan to escape the cool summers and warm winters in Santa Rosa.