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.