It’s not enough to just go ahead right now and proceed with the extra work-the “issue”. We need to get a bit philosophical first. So, here goes.
Let’s first make the wild assumption that you job cost your work-you assign cost codes to each phase of your work so that you can determine whether you are winning or losing on various phases of your projects. If you aren’t doing this-yikes–you aren’t even in the minor leagues yet! And your prospects for long-term business survival are not really all that great. Remember, it’s extremely difficult for even established, well-capitalized contracting companies to survive over the long term. When you complicate that by eliminating infrastructure, you are courting disaster.
“Another club can be beating you for six innings, but for some reason the good ball clubs get tough and win them in the last three.” Billy Martin
It’s not my intent to teach job costing here. Almost any decent computer payroll program will help you. Or, put in a call to your industry association and ask for some help. And please, it’s not a good idea to tell Coach that you don’t belong to any associations! Become involved in at least one. Your association needs your input, and you obviously need your association, as well.
The first assumption-you know how to keep score
At the conclusion of each project you should be conducting a “post mortem”. What went right and what went wrong? What costs did you estimate correctly, and which things did you blow? Be honest. If you’re honest, you’ll get better. If you never want to admit you make mistakes, then you’ll have a very hard row to hoe.
Well, that’s why we job cost. We want to know the score. How did we do-really? Are you okay with just knowing you made an overall profit of, say, 15%, or 35%, or would you rather know that you lost a little on phases 1 and 3, but did real well on phases 2 and 4? You know what I’m talking about.
“Perfection is not attainable. But if we chase perfection, we can catch excellence.” Vince Lombardi
Find out what are your company’s strengths and weaknesses. Find out as soon as you can. The sooner you know what course you are on, the sooner you can make a correction if you are going off-track. And there will come a time in your business when, in order to keep the doors open and hang on to your best people, you might have to take some really cheap work. If that’s the case, and this happens to virtually everyone, wouldn’t you want to know precisely which are your strengths, and only take your risks on those areas if you can? Of course. That makes too much sense to belabor the point further, so I won’t.
The second assumption-you know how to keep score for the extra stuff
Problem! Most contractors do not know how to do this well, so they do have a problem. But then, this makes it an opportunity for you, the Full Contact PM, because you are about to discover a rare gem of knowledge that your competitors don’t realize. And this is a huge, critical piece of intel.
Almost all contractors run into extra work. Unfortunately for most of them, they don’t know what they have in their hands, and they blow an opportunity. You won’t!
Here’s the problem for most contractors. They pick up some extra work. So far, so good. But, how does the work get charged on their employees’ time cards? Most contractors deal with it very simply. Or so they think. They have a cost code for extra work. Let’s say that their cost code for extra work is 1000. If the company picks up $5,000 of T&M extra work, the employees charge their time, equipment and materials to cost code 1000. Easy enough.
“See the ball. Hit the ball.” Pete Rose
But let’s play this out a bit to illustrate the point. Let’s assume that the client likes the contractor so well that next week the client gives out some more extra work–$10,000 this time. How does the contractor deal with cost coding on this latest work? Unfortunately, most will just have their employees still cost code it to account 1000.
See the mess up ahead, yet? Let’s add in a bit more. The following week the client awards $8,000 of yet, another type of extra work. Where does this get charged? To cost code 1000 again? So there are three different types of extra work all being charged to the same cost code? Just to make it fun, how about if the crews are doing all three types of extra work, each day. How do you track that? How do you get the client to sign for this stuff each day? I believe that the proper term for this mess is, “Iceberg dead ahead!”
Still having trouble seeing the mess? Let’s see if we can add some clarity. Recall a few chapters back when we talked about the importance of reducing everything down to a single issue? RFIs, letters, quotes-the works. Remember? It’s the same with extra work.
“Nobody remembers who finished second but the guy who finished second.” Bobby Unser
In a perfect world, here is what your foremen should do. They should actually create one daily ticket for each item of work. In our example, your foreman would create three daily tickets on this day-one for each type of work-and your foreman would get your client to sign each one.
Sound difficult? Only in the beginning, and only because your foremen are not yet used to doing this. It’s actually a much easier method, and here’s why. There will be times when your client might readily agree with two of the three tickets, and be very willing to sign, yet might take some exception to the third. It is much easier to take the time, in the beginning, to separate the issues, than it is to combine them all onto one ticket and try and separate them later. You talk about taking lots of time and effort-that’s it in spades. It’s so much easier to carve up the work into the various issues, most of which can easily be agreed to. This way, your disagreements with the client will be relatively few. Better yet, most issues will not have any disagreements.
On the contrary, just try putting a whole week’s worth of T&M, for three types of work, on a single ticket, and hope to get it signed without question. We’ve all seen this happen. So let’s just agree to avoid the problem to begin with. Not only will your accounting people appreciate it, but our clients will, too.
Coach’s Tip: Be sure to fully explain on each ticket the nature of the extra work. Never, ever just write “extra work”, because no one will remember exactly what that extra work was, even a couple of weeks later. Fully describe the extra work, and also assign an issue number to your extra ticket. Be explicit!
The secret to successful score keeping
There is a simple, low-stress way to deal effectively with potential change orders and other types of extra work. This is so simple, yet almost everyone misses it. Catch this and it’ll make you so much extra money you won’t believe it! Here’s the way it works. Every time you see a potential change to your scope of work, send an RFI, and wait for the client to respond. Once the client gives you the go-ahead (in writing, of course), assign an “issue number” to it. Refer to every change, or every potential change, as an “issue”, and assign a number to it.
Create an Issue Log
Issues and Issue Logs are not mysterious. Your issue log is just a list of numbers which identify potential extra revenue coming into your company. (See Appendix F for sample.)
Here’s what I like to do. I like the issue number to be three digits, so I’ll generally start with 001, then 002, 003 and so on. You’ll hardly ever run out of issue numbers, because each project has its own set of issue numbers. In our example, if those three were the first items of extra work, I’d identify them as such. In our company’s issue log, which I’d usually have on a spreadsheet, I’d list all of the issue numbers in the first column, describe each fully in another column, and then give an approximate dollar amount in a third column.
In our example, Issue 001 would be fully described and would show that we are anticipating approximately $5,000 in T&M costs; 002 would show $10,000 and 003 would show $8,000. The spreadsheet is set up to show a running total of anticipated revenue. The “guesstimate” doesn’t have to be accurate-just some kind of an indication as to magnitude. This will be helpful to your office when they do the billing for the extra: are they looking for $1,000 in costs or is it $50,000? It helps. Plus, we keep a running total to indicate to us approximately what the value of this extra work is, whether we have requested change orders for each issue, and if we have yet received the change orders back from our client, which allows us to bill for the work.
“Some people regard private enterprise as a predatory tiger to be shot. Others look on it as a cow they can milk. Not enough people see it as a healthy horse, pulling a wagon.” Sir Winston Churchill
The secret to making your issue log work is in keeping it simple and easy for everyone in the office to access. You want your foremen to be on the lookout for potential extra work, as well as on guard for out of scope work. When anything comes up, your foremen just call the PM and describe what’s going on, or what the client is requesting. The PM will normally first write an RFI, but there will be some instances where the client will ask the PM, through the foreman, to do some extra work-right now. The PM can then assign an issue number. Work that day will then get charged to that issue number. An extra work ticket will be written that day, showing that issue number, and the client will be asked to sign the extra work ticket that day, or no later than the following morning.
You will find out in short order that a couple of phenomena happen: first, your foremen will soon get good at looking for extra revenue and at protecting the project; second, your clients will learn that you are very business-like in the way your company runs its operation. They will expect to pay you for what is not in your contract.
A final benefit
The issue number can and should be used for one other item. Let’s think of this as a “bid miss” item. In other words, in spite of a careful estimate, maybe something was missed. There is more work called out than what you bid. For the sake of an example, let’s say that the industry standard was that you would normally do two of something, and that’s what you included. However, the specs clearly said that you would do three of these,you’re your estimator missed it. Ouch!
A foreman should recognize this difference and call the PM. The PM should then assign an issue number to deal with this “bid miss”. Why? I’ll tell you, but first consider this: what does your competitor do? Your competitor buries the cost of this item into something else. In other words, he consciously adulterates his job costs.
On the other hand, as the Full Contact PM, you want to keep your costs accurate, because you want to know what really happened on your job. So you accurately reported an estimating miss. This helps two groups of people: your estimators to be more careful on the next bid, and your foremen, because it makes their job look better. In time, your top management may conclude that bid misses happen on most projects and that you might want to allow for these things on future bids.
By guessing on what these misses amount to? No-you don’t have to guess, because your cost accounting has tracked these misses, and you are able to now approximate a percentage that might be plugged in! How cool is that?
“More business is lost every year through neglect than through any other cause.” Jim Cathcart
Put another way, if you are in an expanding and busy market, and you have learned that your estimators usually miss, say, 1% on most projects, you can actually amend your bid form to include a line item to account for the 1%. This will be an extra 1% that you will recover simply because you now can recognize it as a cost of doing business. Realize that your competitors are probably not doing this. This gives you a little bit of an edge, and we can always use that.
The advantage of keeping score is so that you know where you stand on your project at any given time-you know what’s going on. And when you know what’s going on, you can take that score pad, construct an issue so that you can ultimately win the game.
Scorekeepers love issues. Good PMs should, as well. A Full Contact PM will dive right into the next Session, absorbing everything possible, until understanding issue management becomes the foundation-finally-for effectively managing change.