Change Orders - Sometimes Necessary, Sometimes UnethicalBy: IPVM Team, Published on Feb 19, 2018
Change orders are a common element in project sales. Sometimes they are a necessity and appropriate ways to deal with arising issues, but sometimes contractors abuse them to make profits at the expense of the customer and rival contractors.
Why Change Orders?
Most customers prefer to get a single committed price for executing an entire project rather than paying on a time and materials basis where the contractor(s) just keep running the clock and adding up more time / bills.
The challenge with a contractor charging a fixed price is that they need to know very clearly what the customer wants them to do. This is hard to do since projects can include a vast number of requirements, details, and tasks. Even if the customer or their consultant specifies the project in great detail, there is a risk something could be missed or something else might be desired. Even more difficult, sometimes there is ambiguity or debates about the meanings of words inside a specification and what that covers.
Sometimes, though, change orders are necessary. Things do change. Customers may decide they want more than they originally planned or they want to put things in different places.
Beware Bad Motivations
A project manager for a big national integrator told me in confidence that he was expected to come up with change orders equaling at least 10% of the project cost on every project. Failure to meet this goal would be considered a negative during his performance review.
As a consultant, I am always open to ideas from anyone on how a project can be improved, but don't want project managers or technicians looking for problems that don't exist just so they can write change orders or unnecessarily up-sell customers in order to earn a bonus.
Unethical - Win Low Bid, Make Money On Change Orders
A common motivation / tactic is to bid low on a project, sometimes at or below cost and then plan to make it up via change orders. In some strange way, the contract itself is the 'loss leader' and the change orders are the profits.
The reason to do this is to beat other bidders who are fairly bidding the project, including their required profit on the job.
Exploit Contract Language
While an ethical bidder may reasonably interpret a specification, an unethical bidder may look for contract language that may imply or be potentially vague to exploit. Examples of this could include:
- Generic or missing hardware specifications: Users may not explicitly state new equipment must be used, with some bidders providing refurbished or used gear, failing to provide warranty, etc.
- Missing operational requirement details: Days of video retention, recording frame rates vs. live viewing frame rates, training requirements, or other issues may not be explicitly stated and seen as a change order opportunity for integrators.
- Missing devices: Devices may be shown on a drawing but not a riser diagram or vice versa, leading to contractors omitting it from their price to recoup on change orders later.
- Unit pricing not requested: Users may not specifically call for unit pricing for cameras or other devices during bidding, leaving integrators to mark these items up excessively after the fact.
- Conduit/raceway: Integrators may consider conduit or Wiremold extra in their proposal, noted in terms and conditions, and easily missed by buyers.
These are only a few items which may be gamed after work is awarded, but there are many other examples.
Awarded Contractor Has Negotiation Advantage
Before the contract is awarded, the buyer has a strong advantage, since many bidders will be competing to win the job. However, once the buyer awards the contract, the awardee has increased power. At that point, it is significantly harder to take away the job from the awardee, allowing the winning bidder to push for change orders.
Reputation / Long Term Damage Risks
Now, an integrator who does this regularly risks getting a bad reputation locally for playing that type of game. However, 2 things support integrators who do this: (1) many contracts last a long time, making it worthwhile even in the mid-term to do this, (2) even if their reputation is known, often contracts require or so strongly favor low-cost bids that the bad integrator can still win.
Some recommendations for buyers to protect themselves:
- Read proposal carefully: This should go without saying, but buyers should read and understand what is and is not included in proposals they are given. Many buyers simply look at price and a bullet point scope of work before signing a proposal which encourages change order games.
- Require unit pricing at time of bid: To prevent excessive change orders, users may request unit pricing for each type of camera or other device provided in a proposal and make clear that this pricing will be considered when reviewing proposals, not just bottom line price.
- Set a max change order allowance: Users may also allocate a maximum percentage of the base contract that is allowed for change orders (e.g., 25% of contract price) before work must be renegotiated as a new contract.
- Require detailed submittals: Users may ask for detailed submittals as part of the proposal process, including product data sheets of included equipment as well as risers/line drawings.
- Hire a consultant: Finally, when in doubt, users should consider a security consultant to manage their RFP process and review proposals, as they are generally experienced in comparing proposals to specifications and spotting these issues before they become problems.