The True Cost of Change
The impact of change on base scope work: Are you recovering everything that changes are costing you?
I think it was Benjamin Franklin, in a letter to Jean-Baptiste Leroy, who famously identified two certainties in life: death and taxes. But those of us working in the construction industry can attest to a third: change. It’s not a matter of if, but when, and how we manage and evaluate it. Change orders are a daily fact of life in our business.
In masonry, as in most other types of construction, we evaluate the cost of changes to the work in one of four ways. Where the contract includes a Schedule of Rates or a Bill of Quantities and the changed work is of a similar nature and can be executed under similar conditions, we simply measure the changed works and multiply it by the contract rate to arrive at a value. It’s as simple as Value (V) = (m2 x $/m2).
Where no agreed unit rate exists, we can take out a calculator and build one up. Where work is undefined and difficult to price, we often use time and materials – T&M – as a way of ensuring compensation, At other times, we can estimate our costs, and add a contingency and a markup to arrive at a lump sum.
However we do this exercise, the objective is to cover the direct costs of the changed work and the indirect costs associated with it, and to make a margin on top. But hold on; we’re missing something here.
While we concentrate on covering costs and making a margin on the changed work, we might well be losing money on our base scope. In recent years, a number of studies (largely focused on mechanical and electrical works) have been undertaken into the impact of change on base scope work resulting from productivity losses. Sounds complicated, but it isn’t.
Here’s how it works:
Suppose you have a five-mason and two-helper crew producing 5m2 of single skin facework per hour (I’m using English terminology, for which I hope American readers will extend me some latitude).
Suddenly, the general contractor needs a mason and a helper to spend a morning working on a critical change on another part of the project. “It must happen now,” so away go your mason and helper.
Can you see what’s happened here? You’ll be paid for the mason and the helper to do that changed work (probably on T&M), so you’re covered there. But what about the impact on the crew left behind doing the base scope work? You suddenly have an unbalanced crew of four masons and one helper, and as it’s a fact of masonry labor economics that one mason’s helper cannot keep up with four masons (unless he is Superman), base scope productivity is now being impacted.
If two helpers are needed to ensure that enough bricks are loaded out and muck produced to lay 5m2 of brickwork per hour, then one helper will only be able to supply for 2.5m2. While you did have five masons laying 5m2 per hour (1m2/hr each), you now have four masons laying 2.5m2 per hour (0.625m2/hr each). Productivity has been impacted by almost 40 percent.
This is a simple and extreme example, but it makes a point. It’s not difficult to see how impact on base scope productivity can quickly put a mason contractor in a serious loss-making position, regardless of how good he is at recovering costs and making a margin on changes.
Let’s take a closer look: In our simple example, suppose that masons cost $30/hour and helpers cost $15/hour. Before the change came into effect, the labor cost of the base scope work would be $36/m2:
($30×5)+($15×2)/5m2 = $36/m2.
If the unit rate for the work included a 20 percent margin on labor cost, then the labor element of the unit rate would be $43.20/m2, which would secure a margin on labor of $7.20/m2.
While the change is in effect and the crew is unbalanced, the labor cost of the base scope work increases to $54.00/m2:
($30×4)+($15×1)/2.5m2 = $54/m2.
The unbalanced crew would result in a loss of $10.80/m2 ($54-$43.20) on direct-labor productivity impacts, and we haven’t even begun to discuss equipment inefficiencies and associated indirect cost impacts.
In closing, change in construction is a fact of life, but be aware that it could be costing you a whole lot more than you think.
Howard Morris is a construction professional specializing in contract disputes and claims arising from productivity impacts. He can be reached at email@example.com.
- 94Years ago the construction business was a lot simpler. All you had to do to be successful was bid it, build it and bill it. To grow your company, you just worked a little harder.
- 93During my first seven years building my construction company, I tried to do too much myself. I put all the estimates together and presented the bids; awarded, negotiated and signed all the contracts, subcontracts and change orders...