Executive Summary: When in a changed condition situation, the best way to minimize loss or to survive, depending on the case, is not to spend less, it’s to not spend at all. Take advantage of situations where you can spend zero.
We’re going down. We’ve all been in a situation where we’re going about our business of performing our scope of work under the conditions clearly expected and as depicted in the contract documents. Then something happens that changes all this. You’re now aboard the USS Project Titanic and the ship’s taking on water on all decks and going down hard. For you, the contractor, it means you’re bleeding cash out of every Company orifice. You’re faced with three options:
1. Notify your client of the change and then power through it. Submit regular bills to your client for payment.
2. Put an extra person on the crew to document the event for maximum financial recovery in change order negotiation/mediation.
3. Stop work.
I’ve done all of these and wish I had done #3 more often.
The instant calculation. If your client is not acquiescing to your request for entitlement and equitable adjustment, it’s time to pull out the $5 Casio. The calculation you need to be doing as you start to enter into a field conflict is figuring out if you’re going to lose less money (1) working through the matter and finishing the scope of work (and spending as you go) or (2) just stopping work and resolving your differences here and now (the problem here is that your contract likely doesn’t permit you to stop work).
The major advantage in stopping work is that this may be the final time you have any sort of leverage. Once the infrastructure is in place, your leverage is gone and everyone knows it. You do. They do too.
Stopping work is a contractual risk with the consequential effect perhaps being a backcharge to replace you. However, two things are guaranteed if you stop:
- You maintain leverage – the job has stopped and you can start it back up immediately
- You are not spending money – the bleeding has stopped
This is a business decision which may affect you financially and/or reputationally.
My story. I was a subcontractor on a federal project with one of the world’s largest contractors. My contract scope couldn’t have been simpler: excavate 4,000 lineal feet of trench in red dirt to provide 3’ of cover for electrical conduit. My contract was $238,000; I spent $800,000. “How does this happen?”, my controller kept asking me. I kept asking myself, “why didn’t you just become a dentist?”
We were able to lessen the loss with a change order, but that only took the loss to $400,000. It was a nightmare for all parties on this project from the general contractor down. The running rule of thumb on the project was that everyone spent twice their contract value plus a little. Looks like we were in the norm.
The other civil contractor on the job was way smarter than me. He had a subcontract for the civil package worth about $5,000,000. Things were so bad on this job he finished out Phase I and packed up and left. I don’t know if the general contractor chased him down to hand him a massive backcharge for the replacement contractor expenses, but I know that the day he walked off that job the wound was stitched up and the bleeding stopped. I think his thought process was “get out while I can and let them chase me”.
I’m not a supporter of walking away from a contract obligation, but at the end of the day, this civil contractor owner made a business decision to keep his company rather than spend it into financial ruin with a client that was unwilling or unable to talk sense into the federal government.
His decision was a business one – the best way to save money was to not spend it. “I’m done spending money and I’m outta here” is what he determined. I wish I had done that.