Don’t Inflate Your Pricing!

One of the major elements of the risk control process discussed in our textbook is change control management. Controlling and managing changes is an extremely challenging task for many project managers. I think the authors were spot-on when they used changes on a construction project as one of their examples. In my experience in the commercial construction industry, managing change order requests is typically a large part of the project manager’s job. In fact, on some projects the volume of change order requests is so large additional staff are brought in simply to manage the changes. It’s also important to realize that managing changes well is an opportunity to improve your firm’s reputation and strengthen relationships with key project stakeholders. However, poor change control management can lead to cost overruns and schedule delays, damaged reputations, and severing of business relationships.

I wanted to touch on an element of change control management that I believe is hugely important but is often overlooked – managing the pricing of changes. My experience is in the construction industry, but I think my lessons learned can be applicable to many other industries as well. The way I have dealt with managing the pricing of change order requests is simple: do your homework, be honest with the owner, and be transparent with your pricing. The change order process is simple. The owner provides a change order request to the contractor to modify the contract documents in some way, like a request to add another room to a building. The contractor then reviews the request and submits a cost proposal to the owner including both cost and time changes if appropriate. If agreed to by the owner, the contractor proceeds with implementing the changes. Contractors in the construction industry generally have a bad reputation because they take the view that these change order requests are their opportunity to make up losses or errors they have made on the project. So they submit inflated (high) cost proposals and add days to the schedule each time a change order request is submitted to the owner. This is a short-sighted view and most often leads to conflict and an adversarial relationship between owner and contractor.

I take the more long-term view that change orders are an opportunity to improve my firm’s reputation and strengthen a relationship with the project owner (and other key project stakeholders). I have had the most success in managing change orders when I conduct due diligence on the changes, meaning I determine exactly what the owner wants and price as accurately as possible. This takes a lot of effort to do, but it pays off in the long-run. During negotiations this gives me leverage – I can physically show the owner how I calculated my price, and by using accurate quantity estimates and accurate unit costs, that only leaves markups to negotiate over. The owner may still not like the price at the end of the negotiation, but I have found they are much more agreeable and feel like they are being treated fairly in the process. So my takeaway is that I would encourage people in other industries to consider change requests not just as a way to grab additional profits, but think of them as an opportunity to strengthen your firm’s reputation and build stronger, more long-term relationships with key project stakeholders.

Source: Project Management: The Managerial Process, 6th Ed., authored by Erik Larson & Clifford Gray.

Project Management in the Construction Industry

One of the topics we have been discussing in class is scopes of work. When writing subcontract agreements in the construction industry, writing the various scopes of work for each subcontractor is a critically important task. In general, each subcontract would include what is known as the “boilerplate” agreement, standard contract language that stays the same on every project. Then the scope of work section of the contract agreement is written, specific to the tasks you expect that subcontractor to perform during execution of that individual project. Writing the scope of work effectively tasks a lot of skill and communication, and I’m sure it is the same in many other industries. It is a balance between being too specific and too general. If you write the scope of work too specifically, and you make a mistake or omit an item, you as the general contractor bear the responsibility (and costs associated with it). If you make the scope of work too general, the subcontractor will add cost to his or her price for things you may not want him or her to do, things you may have already purchased from another subcontractor. Creating well-written scopes of work is one of the most important responsibilities of a project manager in the construction industry. Do any of you have experience writing scopes of work in industries other than construction? Do you follow any specific strategies when writing them?

There are numerous tools available to assist a project manager with organizing and managing the numerous tasks required on a large construction project. One important tool that we use is the project plan. Developing a project plan like we discussed in class is not only a good idea but a requirement at my firm. It requires a tremendous amount of work to produce, but it can be an invaluable tool used throughout the life of the project. Some of the items the project manager must determine and then include in our project plans are the project schedule, monthly gross billing projections, general  conditions budgets, project risk analysis, contingency budget, profit analysis, staffing requirements, and many other items. Clearly it takes a lot of effort to create the project plan during the start-up of a project, but it helps organize and present the critical project information in a format that is consistent and comparable throughout the firm. Is creating a similar project plan document used in your firm to manage projects? If so, have you found it useful and worth the effort to create?

While discussing project management in the construction industry, I also wanted to share an exciting new tool that is currently revolutionizing the way commercial construction projects are managed. The tool is called Building Information Modeling, commonly referred to as BIM. The benefits of BIM are limitless and have changed much of the way construction projects are managed. BIM is essentially a computer program that creates a 3D model of the construction documents (blueprints and specifications). Combined with cloud technology, the benefits of BIM modeling are tremendous. Since the tool is not applicable to all industries, I have attached a link to a short video from Devenney Group regarding BIM if you are interested in learning more.