Change Orders: punishment or profit

Are change orders intended to punish the
customer (or the builder) or is the goal to profit
from them? In reality, the honest answer is NEITHER.

Many people believe that builders love change orders.
We cannot tell you how many people have said to us
"That's where a builder makes all their money." WRONG!

If you were to look at national statistics going back many years the
majority of builders actually lose money on change orders. It's true.

How can that be? Change orders require a great deal of effort. They are often made under time constraints. The timing may not always allow you to properly consider all aspects of the change. When a price is given for the change it very likely is not adequate to cover the real cost of the change.

To restate the point of this post - - The administrative fee associated with a change order is not intended to punish the customer (or the builder) and it is not intended to be a profit center in and of itself.

Just what does the fee for a change order cover?

1. The additional labor required to assess the cost of the change. A builder deserves to be compensated for the effort involved in implementing the change. There are 12 steps involved with a change order. Each must be taken with careful consideration.

2. As your builder we are required to warranty the labor and materials involved in building your home. Similar to an insurance company, we require compensation for the risk we assume. If the cost of a product increases, the risk (cost) associated with replacing the product increases. The cost of insurance for a Corvette is greater than the cost to insure a Chevette.

3. Make no mistake a builder is a business person. They are required to carry business insurance. The premium for a builder's insurance policy is based on the total value of all homes built. If the cost of a home is increased, the insurance premium paid increases. If a builder does not charge a fee for the increased cost of a home the builder actually loses money.

4. Taxes - The state and federal government tax builders based on sales. If a customer increases the cost of a home the builder has to pay more in taxes. If a fee is not assessed to a change order the builder loses money.

5. Creditors require a business "make" money in order to provide credit. If the financial statements of a business are not sufficient to warrant credit the ability of the business to conduct its affairs is severely limited. A builder requires credit in order to build your home.

Please know that we are not writing this post to justify charging our customers more money. Most builders would love a "change order free" world. We are writing this post to bring clarity to an often misunderstood part of the building process.

The best defense against change orders is to MAKE YOUR DECISIONS IN ADVANCE OF CONSTRUCTION. If you do that, changes during the course of construction are typically limited and often minor in cost. This is the best position for both the customer and the builder. Promise!

If you came to our blog from a source other than our website, please visit us at www.heartlandbuilders.com. We will be glad you did.

Build on! Build with Confidence. Build for fun. June is "Buy your Builder a Popsicle Month." It's hot out there.