You can often expect change orders during a construction project, but they come with a cost.
Think about it — you’re delaying a project, while also reevaluating its estimated cost. Time is lost in the process. As a contractor, you need to be careful about not losing money on a project when change orders arise.
The change order margin is the difference between the original estimate and the final cost of a project. It’s essential to keep this margin as high as possible, especially if you are a contractor or subcontractor.
Factor any additional costs that might be incurred during work. The higher this margin, the more profitable a project is for a company.
Tips for Improving Your Margins When Negotiating Change Orders
Change orders are inevitable, but they don’t have to rob you of profit. We’ve collected the best tips on how to better negotiate your change orders.
A change order is an additional amount a contractor agrees to charge for any changes ordered by the customer after the contract has been signed.
The margins on your change orders should be set at a level that is both reasonable and competitive. It needs to cover the costs of any unexpected changes, while still leaving enough profit for your company.
We recommend setting your change order margin at 10% to 20%. This will provide you with enough room to cover unforeseen costs while still leaving room for profit.
It’s crucial to leave enough wiggle room for errors or changes. Construction projects are highly unpredictable, and change orders can be mathematically complicated. Some contractors are nervous about increasing prices and losing a client.
Additionally, don’t over-promise on what you can do in your bid.
Not providing enough margin for error could leave you with no profit. When trying to increase margin, don’t forget the error probability.
Let’s look at all the options to effectively negotiate your change order margins. As a contractor, your work is often unpredictable, so it’s essential to maintain healthy margins in any ways you can.
Build Client Rapport
To negotiate better margins as a subcontractor, you need to build client rapport. It is crucial that you understand what your client wants and needs.
It would help if you took the time to learn about their business and make sure that they understand yours. This will help you establish trust with them and make it easier for them to work with you on future projects.
Building a solid rapport with clients will help you negotiate better. When you establish trust with your clients, they’re more likely to trust your recommendations and estimates.
This will require strong communication skills. Establish from the start, and if or when a change order should arise, you can communicate the cost change effectively.
Lastly, building good rapport could also lead to more projects in the future. It will not only help keep your margins high, but can lead to more work in the future. Satisfied clients not only come back when they need more work later on, but will also provide you with great word of mouth.
Know the Original Contract
You want to understand all elements of a change order, which starts with having a solid handle on the original contract prior to the changes. The better you know it, the easier it is to increase the margin reasonably when negotiating change orders with the client.
The person requesting the change order will usually have some insight into what needs to be done and why. It helps to understand who that person is, and what they’re trying to achieve, before taking any action.
Understanding the original contract will help you accurately estimate changes in cost associated with whatever additional work needs to be done.
Put the monetary values side-by-side to compare, and double-check them thoroughly.
Include Change Order Clauses in Your Contracts
Change order clauses should always be present in the original contract.
Leverage Your Work Experience to Negotiate Higher Prices
There are many ways to improve your profit margin, but one way is to leverage industry experience. The more work experience you acquire, the more you can increase pricing because of your professional expertise.
The old saying goes, “you get what you pay for.” That goes for many services, and construction is no exception. If customers want quality, it comes at a cost.
Depending on how seasoned you are as a contractor, you can leverage your experience to justify higher costs to increase your profit margin – for change orders as well as your original contracts.
Don’t be intimidated. If you build value, customers won’t question your pricing.
Break Things Down into Smaller Parts
If you’re bidding on a large project, break it down into smaller parts. This will help you avoid the risk of losing money if there are any changes to the original plan.
Breaking things down makes it easier to explain the changes and associated costs to your client, as well as making it easier to track and manage change orders and fees.
You won’t feel overwhelmed by tracking changes if you break the costs and expenses down, making it easier to strategically maintain high margins.
Change Order Software is a Gamechanger
If you are not careful, you might have a negative change order margin. This can happen if you factor in any additional costs incurred during work and miscalculations.
Using software is one of the best ways to stop this from happening and keep your contracts profitable when changes arise. It can help you manage your change orders more efficiently and reduce the risk of errors.
Software can also help you track the progress of your change order, so you know when it will be completed. This will allow you to plan for any potential delays or issues.
Trak Changes can transform your business and manage your change orders effectively and efficiently so you don’t waste more money.
If you’re ready to try Trak Changes, sign up for our one free week trial! Change order management has never been easier.
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