The project was proceeding fine. The owner was pleased with the progress, and the contractor had been very compliant delivering everything the owner wanted. Unfortunately, however, when the project was nearly complete, the contractor’s new management stepped in and made a claim on the project — effectively doubling the cost.
As part of the acquisition of a small, privately held company in the aerospace industry, a due diligence effort was conducted. The company had a portfolio of highly specialized lump sum EPC projects – one of which had some margin deterioration. Explanations were reasonable, the level was not alarming and there was a longstanding relationship with the customer who was responsible for 20% – 30% of the company’s annual revenue. Projects with this client had typically yielded strong margins in the past, and there didn’t seem to be any cause for alarm.
Over the course of the next few months, the acquisition was completed. At the time, that relatively small project (total price just over $3M) was holding steady on its projected costs and margins.
But when a project review was held it uncovered a project in decline.
Further inquiries yielded a disturbing series of email directives from a number of client representatives including some major design and performance requirement changes such as:
Although the newly acquired company felt some obligation to their faithful client, they were “good-willing” themselves into a net loss of about 50% of the lump sum contract price. That’s a NET LOSS, not on the “as sold” margin, but of the total contract price!
It was clear that change management training and a thorough assessment of the situation was required.
At the outset, it was a daunting task. Working in favour of the contractor however, was the fact that “Management of Change” was covered only at a high level in the contractual documents. The owner, not being protected by a robust change management procedure, was at a disadvantage. In addition, the owner’s representatives were not well informed about the dos and don’ts of change management either.
In short, the owner had not prepared or protected themselves FROM themselves. Ultimately, the contractor was able to present and negotiate a change order that not only recovered the direct costs overruns, but also produced a good margin for themselves. They were able to do this, in part, because of the old adage: “He who has the best paper, wins.”