Business Negotiation February 18, 2014

Changes are Profits in Escrow-Buyer Beware

In my opinion, few things are as difficult for buyers as the negotiation of changes to an existing contract. There are many pitfalls facing a buyer when negotiation a contract in which changes are likely to occur.

“Changes are profits in escrow.” A clever project manager or engineer can earn his salary many times over by encouraging a customer to make changes. That’s where the real money is. Changes are always difficult for the customer to cope with. In the face of changes, the balance of power shifts rapidly in favor of the seller, no matter how competitive the original bidding was.

A seller’s ability to exploit the situation increases when a buyer is unclear about the specifications they wish to meet or the scope of work that must be done. The more fuzzy their thinking along these lines, the more they will pay as things change. And change they will.

To understand how to cope with changes, we will look at a situation that frequently arises in painting a house. What follows is applicable to any contracting or consulting agreement. These are the precautions you can take to protect against exploitative “change artists”:

1. Recognize that even in something as simple as painting, changes to the contract will occur.
2. Make a list of potential changes in your requirements before you place the job with any contractor. For example, before painting begins, you may not want to paint the closets or hallways because they look good enough. Later when the rooms are painted you are likely to feel that the unpainted halls and closets must be spruced up to match the newly painted ones.
3. Get a price from the preferred paint contractor for each of the potential changes and add-ons before you award the contract. Then, when changes actually occur you’ll have a basis for fair pricing.
4. Talk to each contractor about these potential changes. They are likely to provide good advice as to how best to manage the changed requirements and how they will alter the work schedule.
5. Try to include as many probable changes into the original competitive bidding as you can. Get pricing breakdowns on a room by room basis and an item by item basis. The better the cost breakdown you get, the easier it will be to negotiate changes later. You’ll pay less.
6. Recognize that the paint contractor will raise the price of every change as much as he can. Negotiate hard.

The ideas for anticipating changes and dealing with them apply as well to complex contracts as to simple ones. A good change control system and procedure is essential. Close supervision by management and prompt negotiation of every change keep costs and aggravations down. Alert buyers who are aggressive in protecting their position can reduce the financial impact of changes.