The Real Cost of Late- Stage Change Orders Business Management & Information Technology Brief

Define the offering and specifications. Negotiate and secure pricing and terms across the entire project. Develop an accessible and accurate information, document and reporting platform. Can we build a home 100% on paper? A robust planning process will dramatically reduce project changes and related impacts on cost and schedule. The PLAN

Managing customer expectations to achieve the desired result without losing your shirt requires a clear understanding of the real cost of change. Is change inevitable? Most people do not realize the complexities of bringing together people and components to deliver the product as anticipated. The PLAN The RESULT

Late-stage changes hurt profits more. TIME Project alignment Project start Project delivery Development Mobilization Construction Commissioning Delivery INVESTED COST

Develop products and specifications Negotiate materials and services pricing and terms Set operational procedures Verify paperwork Share information with internal business team Enter customer, plan and selections into the system Obtain CAD prints for engineers/Plot Plan Order permit Input selections and options Create construction floor plans Create construction review documents Job is “Computer Solved” after review Create estimate detail Purchase orders created and delivered to providers Providers send orders for inventory and schedule services File/Job is released for construction Reduced return on investments already made … What is the real impact of change? Development & Mobilization Processing COMPLETED

What are the soft costs to change? … the company must revisit work completed and issue new documents: Customer change order Revised estimate detail New purchase orders If the client requests a change ─ for example, to eliminate a kitchen peninsula … Development & Mobilization Processing REOPENED

Soft costs include time and error. Development & Mobilization Processing REOPENED Cabinet supplier Countertop supplier Lumber supplier Framer Trim carpenter Flooring supplier Flooring installer Electrical supplier Electrician Cabinet hardware ✓ Cancel P.O.s ✓ Create new P.O.s The company must disseminate the change throughout the entire project team. This rework exposes the project to error. Supplier makes related changes to his suppliers

No change is simple. Development & Mobilization Processing REOPENED This simple change to the kitchen plan would add $2,000 to $3,000 in soft costs from non-revenue producing activities required to process the change. All changes cost money and time. A single change order after files have been processed costs the home building company a minimum of $250 per piece of paper.

No change is simple. Salesperson writes change order Salesperson gets sales management approval Sales management gets other approvals Change is logged into tracking spreadsheet Estimating does new change take-off Sales gets customer approval of cost Drawings are re-created Job is re-processed Purchase orders are re-issued Trade partners are re-notified (x 3) Schedule is re-configured Job costs are changed in multiple systems 12 steps to process a change order

All changes reduce profits. Multiplied across the company, changes leave substantial income on the table. The time spent could have been invested in revenue-producing efforts: for example, developing new options or floor plans. If the company processes 30+/- late-stage changes on 10 homes, these change orders are estimated to result in … $7,500+ in lost profits.

Lost profits are just one consequence. Company goodwill is at risk. Vendor re-work costs decrease return on hard costs. Reputation falters when things don’t turn out right. The building team frustrated by having to “fix” the problem. Salespeople spend time chasing changes, info, lobbying for changes, internal “selling” and more. Public perception of the company’s integrity suffers for not having done what was promised.

What we do not know. There is no perfect information... The customer is rarely right – because they don’t know what they don’t know!

Thank You. The BMIT Committee thanks Charlie Scott for developing the material included in this presentation.