Contractors can lose money when a project has a change of scope. But a new study is aiming to help contractors get paid for their work.

Sometimes building owners change their minds. Or an inspector will modify construction plans at the last minute.

No matter the circumstances, many contractors will tell you that change is not always for the better.

In fact, change orders on construction projects can be like a maze where the corridors keep shifting. Once you think you've found your way out, another last-minute modification leaves you stuck with backed up deadlines, worker overtime, loss of productivity and so on.

In the end, these changes in the maze can cause construction costs to skyrocket. And many times, mechanical contractors don't recoup those added expenses or must go to court to force payment.

That is why the Sheet Metal and Air Conditioning Contractors' National Association-affiliated New Horizons Foundation commissioned a study called "Quantifying the Cumulative Impact of Change Orders for Sheet Metal Contractors." The study provides contractors with a method to determine exactly how much they need to charge when a change order occurs.

Disrupting the flow

St. Louis-based Welsch Heating and Cooling knows about change orders and the frustrations they can cause.

"Change orders are a fact of life," said company owner and New Horizons board member George L. "Butch" Welsch. "We never get enough money for change orders."

Welsch explains that changes occur on virtually every construction project, creating new challenges and impacting the job's original plans. They can happen for several reasons, but the two most common are when the scope of a project is altered or regulatory concerns come up. The latter happened to Welsch on a project before the New Horizon's study was released.

Welsch Heating and Cooling was selected to provide the mechanical installation for a three-story, 24-unit condominium project in a St. Louis suburb. The base bid on the mechanical systems was $340,000. After mandatory changes, another $142,000 was attached to the bill, bringing the cost to $482,133.

The project was already under way when the fire marshal came in demanding the installation of a fire evacuation system in the building's atrium. According to Welsch, the plans for the project had already been approved by the city and did not include room for such a system. Although the owner of the building had not budgeted for the change, and the project was already in progress, "you can't fight city hall," Welsch said. The company had to create new plans to accommodate the now-required system.

"We had to stop (the project) to figure out what to do," he said.

A large duct chase had to be installed for the fire evacuation system. The contractors on the project had to decide how to install the duct without disrupting the architectural elements that had already been incorporated.

It took approximately one month to redraw plans, recalculate costs and solve the problem.

"It was really tough on the owner because he didn't have the money in it for that, and there is no real sale value (for the new system)," said Welsch.

Getting paid is a problem

The company billed the owner for the extra services it provided. And according to Welsch, this is where many contractors, including his company, run into problems.

"The problem is trying to collect," said Welsch. "You can collect on your raw material and labor costs" but there are hidden costs that most contractors do not charge for and should, he said.

The New Horizons Foundation study shows contractors how to calculate these hidden costs to make sure that they are not losing money on jobs.

Welsch said that 30 percent of the total job price was for change orders and "there is no way we charged enough for many of those changes."

Much of the new expenses included the project managers' time to work out the pricing, and supervisors discussing and negotiating the price with the general contractor and owner.

"I sure wish I had this New Horizons manual available before this job," said Welsch. "I'm sure our charges for a lot of these extras would have been considerably more. Next time we'll know."

Hidden costs

Welsch Heating and Cooling is a good example of why the New Horizons Foundation decided to examine the impact of change orders: too many sheet metal contractors lose money when a change order occurs, foundation officials say.

An example of a company that used the change-order study successfully is Kinetics Systems Inc., a large provider of mechanical services to the electronics, pharmaceutical and general contracting markets.

Ron Rodgers, the chairman emeritus of the New Horizons Foundation, sold his company, J.B. Rodgers in Phoenix, to Kinetics. Rodgers stayed on for three years after the sale. In that time, Rodgers saw some major change orders on projects.

For example, the company participated in the construction of a large electronics facility. The project started at $40 million, but eventually climbed to $150 million due to changes in the plans.

Rodgers said that the electronics company decided during the construction phase to change the design of the building. He also said that if it had not been for the change-order study, the company would have lost close to $3 million on that project.

According to the study, the "ripple effect" of project changes causes many contractors to lose money. The New Horizons study defines this ripple effect as the different components of the job affected by the change, including schedules, shift work and overtime.

"These are things you can be reimbursed for," said Rodgers.

But there are also costs that go unnoticed and end up being paid by the contractor. Rodgers said the change-order study helps contractors find those hidden costs and provides them with a formula to figure them out.

These hidden costs are mostly in the area of productivity. The foundation study concludes that as the number of new orders increase, or if there is a significant amount of extra work during a project's busiest times, contractor productivity will decline.

One specific hidden cost, which the study points out, is the impact a change order has on a contractor's fabrication shop. The study says that sheet metal contractors are in a unique position compared to other trades.

Many sheet metal contractors make their own components in their shop. A change order not only affects what is going on in the field, but also fabrication operations. This disruption can eat up profit. But many contractors do not charge for it.

According to Welsch, the best part of the study is that it gives contractors something to bring to building owners to show where and how they lost money. And if a change order has to go to litigation, a contractor has the study to bring to court.

For information on the study, visit www.newhorizons foundation.org.

(For reprints of this article, contact Jill DeVries at (248) 244-1726 or e-mail devriesj@bnpmedia.com.)

The start of something ‘New'

The New Horizons Foundation says the sheet metal industry needs to keep looking ahead.

In fact, the foundation chose its name to reflect its continual outlook on the industry - scanning the horizons for new challenges and obstacles to help contractors succeed.

"We can never be satisfied with what we have now," said George L. "Butch" Welsch, a member of the foundation's board of directors. "Technology changes, construction demands change, our customers' expectations change. We have to be able to meet all those needs. The foundation is there to help our industry."

Welsh also points out that the New Horizons Foundation is not a Sheet Metal and Air-Conditioning Contractors' National Association project, but an "initiative" for the sheet metal and HVAC industry. It is partly why SMACNA decided to set up a separate foundation.

The association's executive staff and contractor members wanted to create a research foundation, something similar to the foundation started by the National Electrical Contractors Association, officials said.

"Before taking any recommendation to the (SMACNA) board, we made sure that we took a comprehensive look at what kinds of programs and projects would be important to our contractors and to what level they would be willing to provide major financial support to get the foundation launched," said John Sroka, SMACNA executive vice president.

A consulting firm was brought in to research the answers. Close to 100 confidential, one-on-one discussions were held with senior contractors and others in the industry to find out what kinds of programs they would support and at what financial level. When research found that most contractors had considerable interest in starting a foundation, the consulting firm met with the SMACNA board with a strategy to begin funding the foundation.

"The very first step was to enlist members of our industry, the contractors who would receive the most benefit from the research," said Ron Rodgers, chairman emeritus for the foundation. "We each had to step up and make a financial commitment to the new foundation. We agreed we could call our campaign the ‘Summit Challenge.' We established the Summit Challenge Council as the advisory group for every contractor who pledged at least $100,000."

Several individual contractors donated, as well as many SMACNA chapters, including the Bay Area chapter, the St. Louis chapter, SMACNA of Boston and the Los Angeles chapter.

Next, the foundation turned to manufacturers. Companies like Lennox and Estimation Inc. joined the council. Each contractor, chapter or manufacturer who commits $100,000, paid over five years, gets a seat on the council. The council meets to select the research proposals.

"Every project has a task force that includes members of the council," said Welsch. "They help guide the project's progress throughout the year. They make sure that our industry is really getting what we need."

Colleges, universities and research consultants are invited to come up with project ideas based upon general criteria from the foundation. Manufacturers provide the dollars and services to keep the foundation's operations going.

"The foundation has completed eight critical projects with a street value of $541,000," said Dennis Bradshaw, executive director of the foundation. "We have another eight projects in progress at a value of $400,000. So far, we have 21 contractors, five SMACNA chapters and four industry partners, and SMACNA itself involved in the Summit Challenge. These leaders have committed a total of more than $4.3 million to date."

The foundation then presents the results of its research to contractors. The research findings are sometimes part of SMACNA educational programs offered during conventions and meetings.

Past research has included how to recruit more young people to the sheet metal and HVAC industry, tool and material control systems, and the costs of change orders.