April 2016
By George Hedley
Construction is a difficult business with lots of moving parts. On every project there are 5,947 chances for things to go wrong. Contractors find themselves at the mercy of project plans, changes, payments, scheduling, weather, labor, equipment, materials and deliveries. So much can go wrong. So much is out of their control. At the end of every job (when it’s too late to do much about it), the bottom-line reality of what the project manager, superintendent, or foreman has, or more typically, has not done, to manage the contract properly becomes apparent. Not paying attention to key contract clauses about notice, documentation, and change order procedures is a sure way to watch your profit dwindle.
Contracting Is About Contracts
Most contractors don’t like paperwork. Unfortunately, contracting is about contracts, and contracts are paperwork! As much as 50% of all profits made or lost on construction projects can be the result of managing the contract properly. The contract or subcontract defines how you must do business with your customer. Too many contractors and subcontractors sign pre-prepared 5-, 10-, 15- or 20-page contracts without reading them, without having their attorney review them, or without understanding the specific contractual requirements.
Did You Notice?
One of the first things to look for when reviewing your contract is: What requires notice? “Notice” is proper documentation and notification to your customer about a change, conflict, incident, omission or problem, within a specified number of days and in a specified format (usually in writing). Before you start a project, review the contract and prepare a Notice and Documentation Chart,” listing items that require proper notice. This can then be used by the project manager, superintendent, foreman, project administrator and bookkeeper throughout the duration of the project.
W.I.N. With No V.A.s
In the construction business, it is wise to adopt the slogan, “W.I.N. = Write It Now.” Phone calls, meetings or meeting minutes are not proper notice or documentation. Contractors tend to delay providing written documentation regarding conflicts, issues and changes as they occur until weeks later. Often they call or tell their customer about issues and think that is enough notice. When contractors don’t put things in writing until after the fact, or they invoice for extra work without proper notice, they are at risk of not getting paid per the contract. This creates major conflicts when trying to collect for additional work or delays that might be warranted.
Another motto to adopt is, “No V.A.s = No Verbal Agreements.” Verbal agreements aren’t worth the paper they’re written on. Properly record all verbal agreements in writing and e-mail or fax them to your customer the same day. No exceptions. Confirm these in your regular project meetings and monthly reports. A phone call to your customer is not sufficient notice or an official request in any situation.
As a construction manager, I am asked to review change order requests from the general contractor to the owner. On one project nearing completion, we received several change order requests for field conflicts and plan omissions that had occurred several months prior. The general contractor was passing along the subcontractor’s requests for extra items. My review indicated there wasn’t any backup or approvals for the work hours requested, no signed daily labor tickets for the work, or any detailed material invoices to show the actual paid cost of materials. I referred the contractor to the contract, requiring all requests for change orders to be submitted within 14 days of the occurrence, detailed cost breakdowns be provided, and all hours to be verified daily by the superintendent. I also protested that the hourly rate seemed much higher than the actual field labor costs incurred by the subcontractor.
The general contractor was hoping my good nature or integrity would get his change order approved. He claimed that I knew about the problems and should expect to pay for all required additional work. When I asked him to justify the $67-per-hour rate for carpenters and drywall workers, and provide detailed material invoices as backup, he protested and boldly stated the prices were fair. I then demanded that he follow the contract on all requests or I couldn’t recommend change orders be approved to the owner. He suddenly proclaimed I was unfair and mean, even though he was the person who didn’t follow the contract.
On another project, I got a call from the contractor asking if I would “help him out,” as his material prices had significantly increased. He insisted we had discussed this when negotiating the contract several months prior. My memory and his differed on this point. He then accused me of not being “a man of my word.” I suggested he read his contract and follow the requirements for notice and requests for changes if he felt he was due extra money. In retrospect, his request came several months after he was aware of the price increases. I told him if he wanted extra money, the contract clearly required him to document all change requests within 7 days of the event, without exception. The contract also required a detailed cost breakdown with invoice backup from his suppliers for all claims, instead of the lump sum he had requested. I told him price increases do not warrant an increased contract amount without prior written agreement by all parties. I wonder if we would have gotten a credit if his prices went down!
Our written contract actually had addressed the issue of price increase. Unfortunately for him, his prices increased more than he had anticipated. After he realized the problem, he wanted to get reimbursed for more than he was due. If in doubt, you must put requests and notices in writing in a timely manner to document your position and protect your contractual rights.
Sample Notice and Documentation Chart
| Description | Written Notice Required |
| Changes in the work | Within 7 days of awareness |
| Differing field conditions | Within 3 days of awareness |
| Plan conflicts and omissions | Within 7 days of awareness |
| Delay requests | Within 10 days of occurrence |
| Change order request | Within 14 days of change notice |
| Claims and protests | Within 14 days after request |
| Submittal approvals | Within 7 days after submittal |
| Request for information | Within 5 days after request |
| Payment issues | Within 10 days of problem |
| Schedule updates | Monthly updates required |
| * Note: This is a sample chart only. Review the general contract or subcontract on every project to complete this chart. | |
Take the Time to Be Complete
Assembling all documentation, paperwork, change order requests, notices and information required by your contract often seems overwhelming. But once you get in the habit of following the contract, it becomes easy and a normal part of your construction routine. In order to get all that you deserve while building a project for your customer, you must be timely in your requests. Missing the time requirements may result in a loss of your right to collect for things out of your scope of work or control. When documenting items, take a little extra time and be complete in your description of the event.
By not documenting conflicts or changes in a timely and complete manner, contractors inadvertently shift more responsibility onto their own shoulders and can lose the right to collect. Providing proper notice starts at the beginning of every project. Meet with your customer to discuss the contract terms and what it requires. Review and agree on the project notice and documentation required for every conflict or change. Then be ready to follow the contract.
As a professional construction BIZCOACH and popular industry speaker, George Hedley helps contractors increase profits, grow and get their companies to work. He is the best-selling author of “Get Your Construction Business to Grow & Profit!” available at his online bookstore at www.HardhatPresentations.com. E-mail GH@HardhatPresentations.com to sign-up for his free e-newsletter, join a peer mastermind BIZGROUP, implement the BIZ-BUILDER BLUEPRINT, or get a discount for online courses at www.HardhatBizSchool.com.
George Hedley
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