Friday, March 24, 2017

Proper Change Orders Can Help Keep Modular Home Builders Out of Court

What are you talking about? There are no changes allowed after the contract is signed and the house is ordered from the modular home factory.

Well, as a matter of fact, there are at least 150 chances and maybe more for a change order after the contract is signed and money has changed hands. 150 days is about the average number of days from submitting your signed contract to your factory and your customer taking the keys to their new home.


Hopefully none of you will ever see that many on one job but Murphy’s Law is always lurking at the dawn of each new day.

Most contracts to build a modular home require that all changes or authorizations for extras be put in writing, generally before the work is performed. In real life, though, the pace of work out in the field is often so fast and furious that, in the interest of completing the project, change orders are approved verbally, with the understanding that someone will put them in writing when time permits.

Even such mundane things like carpet color choices and paint should have at the minimum an email exchange. The key word here is “exchange.” Make sure you always get a reply from your customer to anything that affects your building of their home, both before it is ordered, after the contract has been sent to the factory and after the house has been delivered and set.

One reason for contention is that unforeseen difficulties, changes the plans that your customer made verbally with you but you never passed onto the factory or even scheduling hassles can send your buyer spiraling off in a new direction.

In addition, plans and/or specifications are notorious for leaving the details up to the builder and their subs. What looks to the subcontractor like a deviation from or addition to the scope of the work you both signed 2 months ago, to you may appear to be a case of the tradesman failing to read the plans.

Important Note: change orders don’t always involve just you and your buyer. Change orders can happen when any subcontractor or factory is involved.

A subcontractor in this situation faces a difficult choice: to risk not getting paid for failure to get the change in writing, or to get called on the carpet for not completing work that you believe was included in the bid. You are on shifting sands. The project could be delayed if the subcontractor refuses to complete work without a change order, or you could end up paying double for some work.

As you may have learned the hard way, change orders written after the fact – or not at all – can lead to major disputes, and both sides can lose big money on change orders that lack proper documentation. When the change order is between you and your home buyer and it is not completed as specified, the courts will in most cases side with buyer.

Generally speaking, many factors can raise the need for change orders, including:
  • haste or inadequate planning in preparing the initial contract;
  • a poorly defined scope of work;
  • compressed project schedules;
  • unrealistic cost constraints;
  • time and material changes; and
  • owner-directed acceleration.

One of the causes of change order conflict is that it isn’t easy for most of you and your subs to say “no” when directed to modify work in the field. As a result, both of you respond to verbal instruction, thus taking a big risk as to whose side a court will take if the owner decides not to pay.

Fortunately, change order pitfalls can be avoided with precise planning and adherence to sound business practices.

Putting the change order in writing benefits all parties, because proving oral change orders is often difficult. While there may not be time to sit down and draft a written document when change order work is required immediately, major changes to the contract should always be authorized in writing before the work is done.

The risk of payment disputes is too great to proceed on an oral change order alone.

When the change order is between you and your sub, a written change order is absolutely essential if the contract price, when modified, is $500 or more.

Here are some other proven, practical methods of avoiding conflicts over change orders and other documentation:
  • Conduct an in-house peer review of working drawings, specifications and other key documents.
  • Scrutinize drawings closely from project concept to the final stage and invite outside review.
  • Keep communications open with ongoing, on-site project meetings.
  • Review time tables several times during the life of a project.
  • Create and use functional checklists.
  • Have a strict company policy, that no one but you can waive, requiring that directives be in writing before any work will be done that is over and above or different from what is called for in the contract.
Here are some other suggestions:

If you, the builder, are ordering a subcontractor to do additional work you should tell the subcontractor whether the work is within or beyond the scope of the contract. Likewise, your subcontractor should make plain their position that new work will require a change order before new work is performed.

Be specific. To avoid misunderstandings, change orders should spell out in detail the additional work that is requested or necessary, and they should be signed and dated by both parties. They should always include whatever drawings, specifications, cost estimates, new deadlines and payment terms are necessary to complete the additional work.

Don’t agree to open-ended change orders. Also known as “time and materials agreements,” these can blow up your budget and strain builder/sub relationships since they allow the contractor to charge for work as it proceeds and materials and supplies as they are needed.

Instead, you are wise to ask for a fixed sum agreement that obligates the contractor to perform work for an agreed upon sum. The contractor must absorb costs if they are greater than estimated or, conversely, can make a greater profit if costs are less than budgeted.

Confirm conversations with a letter or email immediately. If you have to see a lawyer, you will be able to explain what happened with more than “he said and I said.”

Most modular home builders and subcontractors have high standards for integrity and quality. Unfortunately, faulty documentation creates an environment of unnecessary finger pointing and charges of dishonesty.

In the home building business, the day of the handshake deal has passed; more than ever before, ensuring prompt and proper payment requires strict procedures and clear documentation.

And here is a word of advice I learned from experience. Before having your customer sign a change order for more than $500, have them pay you half at the time of signing. If they don't have half the money then, they definitely won't have any of the money at closing.

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