Thursday, January 28, 2021

Customer Change Orders - Profit Center or a Loser?

For many years I was a site builder. During that time I experienced customers changing their minds about materials and design while their home was being built. Modular home builders have it much easier when it comes to change orders. Most decisions are made before the house goes to the production line.


However, for this discussion, I will only talk about change orders after the contract is signed and the mortgage is in place.

First, let’s look at the site builder side of things. There are several times during the construction of the house when your customer will ask you (NO, tell you!) to make a change. 


One is before anything has been down in the area they want changed. Maybe it’s moving a wall that hasn’t been built yet. That is an easy one unless it’s a structural load-bearing wall they want moved and that could require a trip to the Planning and Code office.


Another is when a wall is already in place and the customer says they want it moved or removed. Again it could be a minor inconvenience but not something that you would lose sleep over.


So far, the above situations are almost site-builder related problems. Could be a modular builder might get one of these but it would be an exception to the rule.


But here are some situations both the site builder and the modular builder might face.


The first is a change to a finished area. The wall is finished and painted and the customer wants a couple more electrical outlets added. Or the house is painted and they want a different color. The carpet that came with the home isn’t the right shade or color and remember, they chose it.


Or the customer chose the material and when it was installed in the house it just didn’t work for the customer. Not because it didn’t perform or was installed badly. They just don’t like it.


And let’s not forget the special order items that were to be installed on-site near the end of the project. The special order materials or items have arrived at the supplier and waiting for you to pay for them before they get delivered. If the customer changes their mind, what happens to your stuff in the supplier’s warehouse?


You’ve probably faced these type of changes many times over while building either on-site or modular. You certainly can accommodate their requests but at what cost to you? 


Isn’t that the question you should be asking?


Change orders come in three flavors. The ones that you can make a profit on, the ones that cost you time but little or no money, and the ones that cost you both time and money.


The first flavor is where you definitely need to have a change order policy. Prepare a detailed change order with the costs clearly stated, the time it will take to make the change, especially if it requires you to order special materials and how the customer will pay for the changes. Be sure to build in your standard profit margin.

 

And don’t forget to add the time needed for the change to the ‘time to completion’ clause in your contract.


Demanding payment when the change order is signed is the best policy. Think about this...If they don’t have the money for the change order now, what makes you think they will have it at closing?


The second flavor uses the same contract but the only thing they need to pay at signing is your estimated time to complete the order. X number of hours times the hourly rate. Breakeven and everyone is happy. Most of the time.


The third flavor and admittedly the worst tasting of the lot is how a majority of builders work with a change. The customers want the change. You say you can do it, write down the materials you need to do it, complete the work and don’t hand them the invoice until closing.


“And that Your Honor, is why I shot him.”


Just remember one thing. Change orders completed properly make a profit but if done improperly or not at all will lose you money. There’s very little grey area in change orders.


They are either a mini profit center or they are a profit loser. Your choice!

 

Gary Fleisher, the Modcoach, writes Modcoach News and Modular Home Coach blogs as well as the best site for off-site consultants, Modcoach Connects


Contact Gary at modcoach@gmail.com




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