Work Change Orders & Money-Draw Schedules During Construction
You've had the contract drawn up and want to know what comes next? Need to make changes to the contract or allow for the unexpected? Curious about how and when to pay your contractor? Read this!
You've provided us with a statement of funds from your bank or lending institution, signed the contract, made your first payment, construction has begun and then you find the original structure is more damaged than originally thought or the codes department (or another regulating body) is requesting additional changes. Now what? Never fear... we're here to walk you through the process.
First, let us explore some example Work Change Orders, as seen below:
(All names, dates, prices, addresses, and other identifying information have been removed to protect our client's privacy as we enter into a non-disclosure agreement with each party.)
Plan For Surprise. Not Shock:
1. Changes happen. As mentioned in our previous blog post, this is why we suggest that you allow plenty of flexibility in your total project cost and set aside a certain percentage of funds (we recommend a minimum of 9-15%) above the original contract's total price) to cover incidentals.
Example: You have a $200,000 project planned. Add an additional 15% or $30,000 and you have $230,000. The last number should be the one you base the big decisions on and plan to spend. The $30,000 is your CYS (Cover Yourself) or contingency plan.
*The larger the scale of the project, the larger the contingency plan must be. A 3-million dollar project vs a $100,000 project is a HUGE difference. This is why we suggest a percentage rather than a fixed amount.
2. Contingency Plans
The worst-case scenario with a CYS plan is that you have to tap into all those funds to cover incidentals. The best-case scenario is that you have money left over for upgrades once construction is finished or to put into savings. Either way, you'll walk away from this experience as a winner and breathing a sigh of relief for being a proactive investor!
*Bottom Line: Expect the unexpected and plan for it before it shatters your bottom line. By planning for these things, you're not only mitigating risk, but you're also increasing peace of mind, lowering stress, and increasing your satisfaction with the overall process.
Construction can be stressful but it doesn't have to be! Trusting yourself as well as your General Contractor will go a long way toward ensuring an incredible experience. We're here to walk with you through every step of the process and leave you with confidence and pride at the incredible project you've been brave enough to take on! (Seriously.... deciding to build or renovate is a courageous move that not everyone is well-suited to take on and YOU are! That's pretty awesome!)
3. Work Change Orders
Now that we've covered HOW to protect yourself and the investment you're making, it's time to talk about WHAT KIND of changes you can expect and how these changes come to be.
There are many reasons and governing bodies that control what kind of expenses may arise. The following are just a few examples:
Codes Department - The code enforcement officials are a major player in all residential, commercial, industrial, and other construction projects (depending on your zoning). They are there to issue permits, conduct inspections for compliance, and check for sanitation, wiring, egress, fire, or other structural issues before they become an issue. Essentially, they are there to keep you safe and protect your project.
These inspections are separate from traditional home/business inspections and most architectural firms also hire their inspector. A project cannot begin without first being approved by the codes department and attaining proper permits. The majority of necessary changes will be requested by this entity.
Fire Marshal - A State Fire Marshal must conduct a safety inspection before occupancy to ensure your structure is neither a fire hazard nor an unsafe structure.
They will ensure that all building codes are met and your structure is safe. They will also determine any changes that need to be made before your building may be occupied. They will also issue permits for flammable, combustible, and hazardous material storage vessel installations.
Historic Building Preservation - Before modifying anything on a structure that has been deemed "historic", it must first be approved by the Historic Preservation Commission.
This may seem pretty straightforward but what you don't see is that there can be unexpected damages (especially in antiquated buildings) that could potentially derail a project. For example, The Historic Preservation Commission and Codes Department approve your plans and issue permits regarding removing a non-loadbearing bathroom wall. Once renovation begins on that bathroom, you find there is excessive deterioration inside multiple walls and with the plumbing. The new plumbing has to be re-routed and another wall has to be taken down or moved back. The Historic Preservation Commission says that to preserve the history and richness of the building, you must scrap A, B, and C plan and instead do the X, Y, Z plan if you want to complete your project. We have to comply. Costs change.
Owner-Decided Changes and Upgrades - You open a catalog and fall in love with a certain set of kitchen cabinets or tiles for your floors. Cabinets and tiles arrive and they aren't what you had hoped for. Since you're going to have to use them for a significant amount of time, you decide to change now rather than "forever hold your peace."
This may not seem like a huge deal but, it can add up quickly and often does. Door knobs, locks, security systems, landscaping, light fixtures, ceiling fans, paints, etc are all examples of things an owner may decide on upfront and then choose to modify later on that can change the final cost of a project and institute a work change order.
Several other incidences can constitute unplanned changes but hopefully, this will give you some ideas and help you be more confident in yourself and your expectations of owning a construction project.
4. Money Draw Schedules
This is how you pay for your project. It wouldn't make much sense for you to pay for everything upfront just as it wouldn't be practical for you to pay the entire lump sum at the end of your project.
Enter: Your Money Draw Schedule
(All names, dates, prices, addresses, and other identifying information have been removed to protect our client's privacy as we enter into a non-disclosure agreement with each party.)
On your first contract, you will agree to what is called a Money Draw. This is another term for payments set at a scheduled time or milestone in your project.
Typically, an agreed-upon percentage is paid to the General Contractor at signing and this covers the hiring of the subcontractors, material ordering, and secures your start date for construction and construction begins.
At different milestones of your project, you will be sent an invoice for another percentage of the project costs to continue work. These invoices, as seen above, are itemized and detailed so you know precisely what you are paying for.
If you or another agency has requested that necessary changes be made, they will also be included and highlighted in the next applicable Money Draw invoice. We save all receipts and documentation and will first submit them to you for your approval and signature.