Change order pricing, marketing, and relationships.

IN A RECENT COLUMN, I WAS ASKED TO COMMENT on the following question:

   Why is it accepted or popular practice for the mark up on a change
   order to be so much greater than that of an initial bid? It seems so
   widely accepted that it seems to be a strategy for some distributors
   and contractors to expect to make their money on change orders. Why
   isn't there greater accountability regarding change order pricing?

My good friend and long-time colleague T.J. Gottwalt, AHC/CDC, CSI, CDT, Director of Architectural Development for ESSEX/ASSA ABLOY responded to my remarks with a very insightful comment expanding the question and the conversation.

"From a distributor's perspective, a change order offers an opportunity to make money. The reason for this is that there are rarely provisions in the contract signed by a distributor for mark-ups. When an architect reviews change order pricing, they consider cost to be the cost from the distributor to the contractor. This is very different from the cost from the manufacturer to the distributor. It becomes the architect's responsibility to prove that any pricing for changes is customary and reasonable based on market conditions. I have had architects ask me to check the pricing on change orders, and the architect shows me the costs being given the contractor. In these cases I occasionally find pricing in excess of twice list price being given to the contractor. The best course of action in this scenario (from the architect's and owner's standpoint) is to request an itemized breakdown of the costs so that these pricing practices can be revealed. Based on what this itemized list reveals, an architect can choose to obtain further pricing from another distributor to compare prices for the owner's benefit. On one occasion, the architect I was working with decided to (within the constraints of the contract) obtain the added material from another vendor because the supplier's pricing was so exorbitant. This is, however, rare.

I know from direct experience that many distributors will take on a project at extremely low margins, because they know from the start that the project will require many changes, and that these changes represent an opportunity to increase their margins. Therefore, being able to recognize a project's need for changes up-front becomes a very valuable sales tool, at least in a distributor's eyes."

The above statement is of considerable interest in it own right and fills in a serious gap in my analysis and response to the original question. However, there are other issues worthy of consideration such as professional ethics and the negative effect this type of change order pricing could have on a relationship with a design professionals.

For many years I have maintained that in many industries, but particularly in the architectural openings industry, distribution is one of the most effective and marketing tools available to the industry. I made that statement many times during my tenure on DHI's Strategic Planning Committee. Since most AHCs work for or are closely associated with distribution, most design professionals have some level of relationship with their local distribution. Ever since I started writing my own hardware schedules and specifications nearly 25 years ago, I have prized my working relationships with AHCs and my local hardware distributors. If I was ever made aware that my professional colleagues in distribution were padding their change orders to the extent TJ mentions I would be somewhat upset. If the industry needs to include mark-ups for distribution then I would be pleased to help develop Division 1 language and lobby for changes to the current standardized construction contracts.

Business relationships that do not deal with exchange of money and product such as distribution and design professionals often get second billing and that is understandable. However, I find the ethics of low-balling a bid and making up on the change orders rather disappointing. Especially when distribution could easily contact the design professional and help solve the problems with an addendum.

This is a very, very small industry and extremely interested in each other's business. If distribution starts to get a reputation for change order gouging it will quickly damage long standing relationships with the design community and stress relationships that the architectural openings industry needs to survive and flourish.

Michael D. Chambers, FAIA, FCSI, CCS

Michael D. Chambers, FAIA, FCSI, CCS is a past contributor to Doors and Hardware and recipient of the 2003 Ryan Award for his article "Why Specifications?" from the June 2002 issue. He is principal of MCA Specifications, Construction Product Marketing Group of Daly City (San Francisco), CA. MCA designs, develops, and produces guide specifications, technical data sheets, AIA/CES Continuing Education programs, and design guidelines for construction product manufacturers and design professionals. MCA provides preliminary document, education program, and Web site reviews to help manufacturers be more strategic with their critical marketing tools. Michael is an architectural graduate of the University of Southern California, registered architect in California and Minnesota, and a Certified Construction Specifier. He is a Fellow of AIA and CSI, is a past Chair of the national AIA/CES Providers Council, and currently serves as vice-president of the Specification Consultants in Independent Practice (SCIP).