It’s yourBUSINESSBy Ron Coleman, B. Comm., FCCA CMCThe cost of Impact CostsBut remember: this is a real cost that you pay for. Changesthat are individually priced using only Direct Cost plusOverhead and Profit give you no recovery of Impact Costs.It is generally accepted that where changes account for morethan a 10% increase in labour hours, then there’s a basis forclaiming the cost of the ripple effect.Subcontractors often dismiss the appropriate managementof Change Orders. For a variety of reasons—ofwhich virtually none are valid—they will either forgoprocessing a Change Order or process it at a cost well belowthe right amount. In truth, it can be very difficult to recoverall your costs with a Change Order, but you want to makesure you get as much as possible.The following elements should be identified for everyChange Order:• Direct Cost of doing the change;• overhead to be recovered;• mark-up to be used for profit; and• time extension required.Every Change Order request should include these elements,but it doesn’t end there; numerous additional costs impactingthe job should also be recovered. Unfortunately, theseImpact Costs are the hardest to recover because they are thehardest to document and prove. This doesn’t change the factthat they mess with your bottom line, so let’s explore them ingreater detail and see how you might recover them.The four sides of Impact CostsI touched upon Impact Costs in my October 2007 column,but here we’ll delve deeper. The four recognized categoriesof Impact Costs are:1. Acceleration2. Job rhythm3. Morale4. Learning curveThe activities that cause these elements of change include:• The ripple effect of changes to other trades or to youroverall productivity• Stacking of trades• Reassignment of manpower• Crew size inefficiency• Concurrent operations• Dilution of supervision• Joint occupancy (doing changes while the building isoccupied by other trades)• Beneficial occupancy (doing changes while the buildingis user occupied)• Learning curve• Fatigue• Overtime• Weather changesThese are all valid costs but, again, difficult to documentand prove, then claim successfully. For example, the rippleeffect can only be fully recognized at the end of the contract,so you won’t be able to include it with individual changes.Your options for recoveryConvince your client that you need—and deserve—to bepaid for these costs. Depending on the type of contract,you’ll have varying levels of success. In a Cost-Plus contract,you are likely to recover all of these costs, plus Overhead andProfit to boot. (You won’t be as fortunate in a Fixed-Pricecontract won by competitive bid.)Include an allowance in your bid to cover the expectedcost of impacts, just as you would have an allowance forclean-up, warranty and site safety. This way you also recoverOverhead and Profit on your Impact Costs. Or, increaseyour Overhead mark-up to cover the additional cost.Or you can simply eat the cost and accept a lower profit.The average electrical contractor makes 5% pre-tax profit onsales. If you want to be above-average, you need to recoverall the costs associated with a change.All kinds of contractors have fought numerous legalbattles seeking compensation for Impact Costs, and it continuesto be an uphill battle, but unless you start fightingfor what’s rightfully yours, you’ll never come out on top.Every contractor and every construction association shouldactively pursue this matter, educating both themselves andtheir clients about this issue.Contracts that are well planned and properly executed resultin much lower Impact Costs than those that are poorly plannedand badly executed. But because the contractor does not recoverthe cost of the impact in Direct Cost, it must be recovered inOverhead or by accepting a lower profit. This, of course, requiresthe contractor to increase his price for the next job. Either way,it means good contracts are paying for the bad ones.I would be interested to know where the “professionals” inthe industry (i.e. architects, engineers and others who policeprojects) stand in this regard.Ron Coleman, B. Comm., FCCA CMC, is a member of the Institute ofCertified Management Consultants of British Columbia. A noted speaker,he has completed many interfirm financial comparisons of groupsof construction companies in Canada and the United States. Ron’snumerous published education programs include a 36-hour businessmanagement course specifically designed for ECABC. He is also authorof the book, “Your Million Dollar System: How to Increase the Value ofYour Construction <strong>Business</strong> by One Million Dollars in Three Years”.NFLD: (709) 753-6685NS & PEI: (902) 450-5155NB: (506) 862-1515Quebec: (514) 333-8392Ontario: (514) 333-8392Manitoba: (204) 694-0000Saskatoon, SK: (306) 244-7272Regina,SK: (306) 771-2500Alberta: (800) 263-2684BC: (604) 882-8488USA: (514) 333-839218 • MARCH 2008 • www. mag.com
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