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Getting burned on compensation for change orders

mookey

Hi.  First time posting here.

So, I keep getting burned by clients on compensation over change orders. 

At the end of the project, some of my clients like to re-visit the change orders that occur during the construction phase of the project, and argue with me about whether or not I'm entitled my percentage of compensation for each change that occurred.

  Let me correct that.  They are more than happy to subtract change orders from my overall fee if the change is a credit to them.  But any item that represents an additional cost, they want to argue with me about whether I deserve my percentage of compensation for it. 

In the end I typically end up settling with them and take what little compensation I can get on the change orders.

Anyone else run into that problem?  And any suggestions on how to deal with it?

Thanks,

 

Mookey

 
Jan 30, 15 11:13 am
curtkram

are you a contractor talking about actual material costs, or an architect/designer talking about services?

is this residential or commercial?
 

i can answer this question:

Anyone else run into that problem?

yes.  turns out people don't like to pay for stuff.

Jan 30, 15 11:16 am  · 
 · 
mookey

I'm an architect talking about services. 

Just trying to get clients to honor the terms of their contract, and get my percentage of compensation on the change orders. 

It gets frustrating when clients start to split hairs over whether or how much I was involved time wise on certain changes. 

I'm wondering if anyone has come up with a strategy to fight this fee erosion that happens at the end of a project, when clients are running low on $ and are looking to grab it back where ever and from who ever they can.
 

Jan 30, 15 11:39 am  · 
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curtkram

have you been following any of the lawyer talk on the archinect sessions podcast thing?  I think he touched on getting paid for services.

miles might point you to jaffe's first law.

Jan 30, 15 11:47 am  · 
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BulgarBlogger

Why hasn't anyone thought of including lawyer fees in the contract in case of litigation for compensation?

Jan 30, 15 12:20 pm  · 
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jeiffert

Legal expenses for fee collection are a standard provision in my architect-client contracts.

Jan 30, 15 12:32 pm  · 
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proto

not sure how you record your hours but it sounds like that could be tightened up to aid the discussion of the services you provide

with a specific list of tasks, you can look the client in the eye and ask which services they don't want you to provide

Jan 30, 15 1:00 pm  · 
 · 

Don't wait to bill for change orders, invoice them the minute they are done or if you think there will be a problem invoice them on an estimate before they are done. You have to train the clients to pay you. If they balk you know exactly what you're dealing with and can make a decision about how to proceed before you get in too deep. Waiting till the end is the kiss of death. See Jaffe's First Law.

Jan 30, 15 1:51 pm  · 
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greatescape

Don't be timid. Be assertive and aggressive in a responsible civil appropriate and of the utmost professional manner. 

 

Bill them right after, right then and there.

 

Miles Jaffe is correct.

 

- $

Jan 30, 15 3:14 pm  · 
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mookey

Thanks everyone for your  great comments!

Jaffe, your 1st Law is SO true!

"Jaffe's First Law: The value of a service is inversely proportional to its degree of completion."

Part of the problem was the G.C. was very slow about processing the various changes, and didn't bill for them until the project was winding down. 

But mostly, shame on me for not insisting that the final dollar amounts for the changes be agreed on by all parties up front.  Unfortunately, not the first time this has happened.

On the next project, I'm seriously considering putting up a large neon bill board in a prominent location on the site that states:  "ALL CHANGE ORDERS, AND THEIR ASSOCIATED COSTS (including consultant fees) SHALL BE AGREED ON BY ALL PARTIES PRIOR TO THEIR EXECUTION".

Jan 30, 15 3:56 pm  · 
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curtkram

hopefully this doesn't become a regular occurrence for you mookey, and large signs won't be necessary.

especially not neon.  that sounds a little tacky.  maybe if you dressed it up by putting a neon palm tree next to it or something....

Jan 30, 15 4:01 pm  · 
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Saint in the City

Mookey -- can you be more specific as to what you are asking to be compensated for relative to Change Orders?

Per the B101, processing Change Orders is a basic service, so you aren't entitled to additional compensation if that is all you're doing.  If you are actually providing  additional supporting documentation -- significantly revised drawings, etc. -- then you can bill for your time.

Many firms simply consider all of the associated change order processing and follow-up a part of the expected CA process, and don't attempt to further bill the Owner.

Jan 30, 15 5:53 pm  · 
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null pointer

Actually, it's not unusual to put a cap on hours/fee devoted to change orders.

Source: Kaplan's ARE review manuals. Who says ARE's don't teach you things?

Jan 30, 15 6:00 pm  · 
 · 

AIA contracts are not necessarily something you should model your practice on. Your agreements should reflect your work flow and method as well as the specific requirements of particular projects. My agreements are typically a single page in length and executed with a check from the client that signifies acceptance of the agreement.

In the end a contract is only as good as your lawyer and the amount of money you are capable AND willing to spend to defend it. Since most clients have much deeper pockets than architects, it's generally a lost cause to begin with. Aside from the fact that if we wanted to spend our time arguing about money we would have become lawyers instead of architects. 

Jan 30, 15 6:37 pm  · 
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mookey

Hi Saint in the City,

Sorry, for not being more clear. 

So, it's not the processing of the change orders that I'm having a disagreement with my client about,  rather, its with him trying to parse through each change order and tell me which ones he thinks I deserve to apply my percentage fee to, and which ones I don't.

The changes that occurred during the course of the project have increased the overall construction cost, and since my fee arrangement in this case, is based on a percentage of the overall construction cost, I believe my fee should increase commensurate with the construction cost.

I guess the big question I'm grappling with, is:  Is it or isn't it reasonable for a client to go through each individual change order and decide whether I had put enough work towards each change in terms of either a drawing, or research etc. to merit a percentage of its cost as part of my fee, or should he just suck it up and pay me my percentage on the final overall cost of construction which includes all of the changes that occurred during construction.

Of course my personal opinion on this is yes, he should suck it up and pay me my percentage of the overall final cost of construction!  My rationale for this is because the contract states that my fee is based on the final cost of construction (not the just the original bid amount).  So, whether I produced drawings for a certain change, or simply made a phone call, the amount of time spent on it shouldn't matter, and it shouldn't turn into a negotiation at the end of the job, he should just pay up. 

But I'm open to other opinions...just trying to figure out how much of a hard ass to be with the client, because the unfortunate reality is "everything is negotiable".

Jan 30, 15 7:09 pm  · 
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proto

I know it's a bit of a thread jack, but I just don't understand tying one's fee to cost of construction, but I'd be interested to hear the pros/cons from someone who uses this method.

I suspect the pros must outweigh the cons because folks do it, but I keep getting stuck on the cons...

For instance, when the scope changes such that things are removed, how do you get paid to remove those items from the documents and coordinate the now-reduced scope such that it all works together?

Jan 30, 15 8:19 pm  · 
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proto

to actually respond to your situation

if both parties signed on to a % of construction fee, then both parties should respect that agreement to the extent that it is the normal process of the project. I can imagine oddities where it's reasonable to agree on alternate fees during the course of construction, but not just because the owner's tired of the project costs.

Jan 30, 15 8:24 pm  · 
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BulgarBlogger

For instance, when the scope changes such that things are removed, how do you get paid to remove those items from the documents and coordinate the now-reduced scope such that it all works together?

Why can't you have an agreement where you tie your fee to a percentage of the cost of construction of the ORIGINAL Scope. If the scope of work changes, you get paid for the work you do to eliminate the things already on the drawings. 

I recently worked on a project where an interior designer was involved. My firm was the architect of record. The designer changed her mind so many times that it totally blew our fee out of the sky because every time she changed her mind about something, we needed to update our drawings. Finally, we decided that each change was going to be billed as "Additional Services". 

Jan 30, 15 8:46 pm  · 
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proto

Why can't you have an agreement where you tie your fee to a percentage of the cost of construction of the ORIGINAL Scope. If the scope of work changes, you get paid for the work you do to eliminate the things already on the drawings. 

someone else should probably answer...i personally don't think it works

i believe you should tie your fee to the work you do and the risk you take on -- tying it to a 3rd party's work seems dumb

[...unless it's ridiculously in your favor?!? but it doesn't sound that way above]

Jan 30, 15 9:25 pm  · 
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wurdan freo

Play the game a contact is a negotiation. Set your self up so you can give the owner something and still walk away happy. Why is terretail always on sale?

Jan 30, 15 10:22 pm  · 
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Saint in the City

Mookey, you can ultimately handle what you're describing in any number of ways you think makes sense within the bounds of your contract.  Architects deserve to be compensated for work they do -- and often they are not.  But for an architect, Change Orders may not be the best mechanism toward pursuing that last dime.  Major changes in the scope of the Work will of course require additional compensation for the architect.  But for most changes -- you might consider your input simply a part of a normal CA phase.  Are you really consistently "getting burned"?

Another way to look at change orders is from the Owner's perspective, who usually feels.... regardless of the reason for the CO......that Change Order = Screw Up.  Even when Owners initiate Changes in the Work, they tend to harbor a vague feeling that the Architect really should have caught this need previously.

So you're starting from there:  The Owner gets the "bill" for a Change Order from the Contractor.  The Owner has to pay the Contractor for labor and materials for the actual work from the CO, and so is now starting to lose a bit of the love he once felt for his beloved architect -- the architect who once drank wine with him, and spoke so eloquently about his building.  Said architect -- you -- now bills him again on the same Change Order through whatever means of compensation you'd agreed upon.  And more love slips away.  Repeat this process 40 times.  Notice that by now the Owner no longer offers you wine.

You need to be discerning -- for the sake of your relationship with the Owner.  The Owner might change a floor material to the tune of an additional 300K -- you are saying that you would simply add this 300K to the final contract sum.  Technically, fair enough.  However, I'm simply saying that in the post Contract Award timeframe, your add for services for the 300K will -- and really should -- be scrutinized, because in reality you would not have performed an actual service for your requested additional compensation.  Again, sometimes additional compensation is fair and necessary -- for example, you redesign and redraw an area. 

Finally, do the math.  How much cash are we really talking about?  Our office tends to average under 2% for change orders on a variety of different project types.  So on a small project of 2M, the CO totals would be about 40K.  Then, Mookey, you want your  percentage cut, which at 7 percent of 40K is an additional 2800 bucks.  2800 bucks.  So after all your arguing over which CO is legit and which is not, during which your are most likely even further pissing off the Owner, you get a whopping 2800 bucks added to the projected $140,000 fee.  Worth it?  You can decide, but in my opinion, from a PR perspective, if you really need that last dime, you'd be far better off simply negotiating a bit higher fee on the front end.  Sort of major changes, we tend to just process the CO's and move on.

But what you're describing is definitely one way to do it.   

Jan 31, 15 7:34 am  · 
 · 
mookey

Wow, thanks everyone for the thoughtful responses!  You've given me a lot to consider.

I'm getting the sense that rather than burn the bridge with my client, It would be better to step up to the table and negotiate the change orders on a case by case basis.  Hopefully we'll come to a consensus where we both walk away with something.

I have to hand it to the client, he played us well.  During the design process he kept crying poverty, so we hammered back the design multiple times to get it to fit his 'budget', then during the course of construction, this pile of money magically appears, and he opts for multiple upgrades which increase the project cost by 20%. Of which he'll probably get away paying us a fee on less than half of it.

Jan 31, 15 8:47 am  · 
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Saint in the City

20 percent.  Might've been useful to know.

Jan 31, 15 9:58 am  · 
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Saint in the City

I'm warming up to Miles' posting rules.

Jan 31, 15 9:59 am  · 
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Ah, the poor rich. Alas. Cry me a river you cheap prick.

If your contract was based on percentage cost of work designed you could bang them for the cost of every single redesign *and* for the change orders.

Not that you'd ever get it, but it is a bargaining chip. 

I once had a client tell me he was going to upgrade to marble from tile in all the bathrooms and that I wouldn't get a fee on that. It's only a material change. As if there is no difference in detailing a $15 / sq.ft. tile job and a $200 / sq.ft. marble veneer job. I bailed on that asshole (who owns half-a-dozen Manhattan high-rises) in the design phase after doing far too much work for which I was underpaid. This same prick used the same trick - a limited budget to contain fees - while demanding multiple designs in the $2-3m range. Meanwhile the $9m PoS house he bought and wanted to triple in size needed $900k in repairs and maintenance.

As it was only the design phase it could be said that I came out ahead. Except for the chest pains, which magically disappeared when I quit.

Jan 31, 15 10:10 am  · 
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chigurh

Read through some of the posts, the op's question is murky.

I think the key to billing on change orders is; if it is a change that is initiated by the owner or contractor (a construction change on the fly), you can and should bill for it if it requires time on your part to revise drawings or detailing to achieve what they want.  If it is a change in material or finish or paint color, some other item that requires nothing other than you signing a form, don't bill for it.

If it is a change order that is driven by a mistake by you or the consultant team on the project that requires drawings or detailing to fix it you can technically bill for it, but your client is going to see it as you billing for time on something that you fucked up.  In most cases you eat it, unless you want to have an unhappy client, that is going to think you are a real piece of shit, which is not really conducive to return business or future referrals.  Plus you have the added bonus of the client suing you/filing a claim against your insurance to cover the mistake and nobody wants that.   

Jan 31, 15 10:18 am  · 
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Saint in the City

Save your breath, Chigurgh -- I wrote all of that already.  Didn't land.

Jan 31, 15 12:15 pm  · 
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Carrera

Many years of meetings like the OP’s lead me to separate CA from the base contract. The AIA contracts are too vague on CA and lead to many problems. With regard to fees for added construction cost (change orders) I gravitated to a sliding scale of sorts that worked:

Screw-ups by architect – Zero fee

Screw-ups by contractor – contractor paid fee

Finish upgrades not requiring drawings – Zero fee

Anything requiring drawings – % of additional construction cost

If the CO just involved my CA guy it was just CA, but if the CA guy had to pull in the office then there was a fee.

One of my partners disagreed with my scale feeling that anything that adds value to the building required a fee, feeling that the % fee was our share of total value. He used this explanation with clients on his projects and it worked well…he had a great way of explaining it to clients that I never caught on to.

Jan 31, 15 1:34 pm  · 
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chigurh

anything requiring drawings = % of construction cost increase, including architect screw-ups? Or in that case, architect eats it?

Jan 31, 15 1:59 pm  · 
 · 
Carrera

No fee of any kind was charged (extra) for an architect screw-up regardless the cost or what was involved. Never was asked for a CA refund for managing a screw-up and never gave any. A lot of CA was hourly and it back-door refunded me for my "no-fee" generosity.

Jan 31, 15 2:18 pm  · 
 · 

Clients should never pay for your fuck-ups. Ideally they should never even know that you did.

Jan 31, 15 4:34 pm  · 
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chigurh

agree miles, all depends on what kind of contractor you have....a team player or the type that will throw you (the architect) under the bus every chance they can.

Jan 31, 15 6:43 pm  · 
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go do it

Miles, somebody has to pay. When it falls on the contractor to make it work who does he charge and what does he tell the client.

Jan 31, 15 6:52 pm  · 
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When it falls on the contractor to make it work who does he charge and what does he tell the client.

If it falls on the builder to make it work the architect fucked up. 

There are basically two models for construction projects.

In the team model the owner, architect and builder all work together with integrity and personal responsibility.

In the other model it's every man for himself. Thus clients who don't pay and architects and contractors who can't wait to throw each other under the bus (often with good reason).

Jan 31, 15 7:09 pm  · 
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Saint in the City

Clients should never pay for your fuck-ups. Ideally they should never even know that you did.

Most architects use the AIA contract docs, so this advice won't work.  In the scenario of the big screw up as you're describing, a change order will be needed, which the Owner, Architect, and Contractor all will need to sign.  So on any changes  --  other than minor changes to the Work that don't change the Contract Sum or the Contract Time -- the Owner will always be aware.   See A201 7.1.2 and 7.2.1.    

Jan 31, 15 9:15 pm  · 
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go do it

Am I understanding this correctly? So in the team model all parties are equally responsible for mistakes or omissions?  And the cost is equally distributed as well? 

I have never heard of an arrangement like this before and no one around here would agree to this.

Feb 1, 15 10:18 am  · 
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go do it

Right after I posted I noticed the personal responsibility part. So now the team model is no different than the every man (or women) for themselves model except everybody is to play nice.  Yea I am a team player!

Feb 1, 15 10:23 am  · 
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Saint in the City

^ Are you an architect?  Or do you work in architecture firm?  If yes, read the AIA contracts -- it does not sound like you have. 

Feb 1, 15 10:42 am  · 
 · 

It's not an explicit agreement in the form of a signed contract, it is a model for productive management of a project.

If you're bound by some contract that somebody else wrote, that's your problem. Read my second post.

Feb 1, 15 11:09 am  · 
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Saint in the City

^ What you're suggesting in your analogies won't help a person working in most architecture firms, since most architects use the AIA docs -- love them or hate them.

It's not a criticism of your personal process in design-build, which is a completely different animal. 

So, no argument with you, but it appears that some posters aren't understanding the difference.  There is no way to manage projects within most architecture firms without understanding the AIA docs, and Change Orders are a basic part of that process.     

Feb 1, 15 11:32 am  · 
 · 

I disagree. A positive attitude toward finding productive solutions can be applied everywhere. If the contract limits that it's a bad contract.

I've seen COs that cost more to process than the changes cost to implement. A not uncommon builder strategy is to bid low to secure the job then cream the client on COs. A lot of this comes directly from the way contracts are structured.

Feb 1, 15 11:45 am  · 
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Saint in the City

That's a straw man argument.

My posts pointed out that some of what you've suggested stands in direct conflict with the commonly used AIA documents.  I never said that positive attitudes and productive solutions were bad, or rendered impossible by the AIA docs.

Feb 1, 15 12:05 pm  · 
 · 

Sorry, not sure what you're getting bent about.

what you've suggested stands in direct conflict with the commonly used AIA documents

A positive attitude toward finding productive solutions can be applied everywhere. If the contract limits that it's a bad contract.

Maybe rigid adherence to a process that doesn't reflect the needs of the situation?

Feb 1, 15 1:08 pm  · 
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chigurh

F the AIA and their documents, I strongly believe in putting together your own contracts (with the help of an attorney), cut what you don't want from the AIA contracts, keep what you want. The AIA is not the end all authority on practice even though they like to think they are. 

Feb 1, 15 1:23 pm  · 
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Saint in the City

Sorry, not sure what you're getting bent about.

Uh, nothing.  Where are you getting that?

Maybe rigid adherence to a process that doesn't reflect the needs of the situation?

More straw man.

Most licensed practice implements the AIA docs.  I understand that you are not licensed, and are not practicing in a licensed context.  All good so far, but those reading should understand the difference, and that they are more likely to use the AIA than anything else.  Objective statement.

Feb 1, 15 1:36 pm  · 
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go do it

People make things more complicated than necessary at times. This is what is in my contract:

  • 6. All change orders shall be in writing and signed both by Owner and Contractor, and shall be incorporated in, and become a part of the contract. Full payment for change orders is required before change orders are implemented.

  •           11. Should a dispute arise between Contractor and Owner and trial litigation becomes necessary, both parties agree that the loser shall pay the prevailing party’s attorney fees and cost.

We all work as a team, we all sign the change orders, we all want the project to run as smooth as possible.

If shit happens though the loser pays.  Number 11 keeps everybody on their toes.

In 25 years in business I never had to go to court or arbitration.

Feb 1, 15 2:10 pm  · 
 · 

^ What kind of practice do you have?

Feb 1, 15 10:18 pm  · 
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go do it

^ Just the run of the mill General Contractor.  Residential mostly.

Feb 2, 15 12:13 am  · 
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mightyaa

I handle it sort of like Carrera.  I convert the % contract to lump sum at CA after the bid is accepted.  Every change order that takes any of my time gets stuck with a additional service out of my office.  If it's my mistake, I don't provide an additional service.  The owner can negotiate my additional service if its the contractor error. 

Basically how it sorts out.  Owner request and upgrades get both a CO and my additional.  Rarely, the GC screws up requiring additional time for me, but an example might be an extra punch list because they weren't ready or construction delays dragging out CA (I set the number of visits during the conversion). 

Most though are what the GC would call an omission, and I'd say could be reasonably inferred from the drawings... so it gets down to that pissing match and I'll flat out let the owner know I'll provide the bull extra detail or direction as 'goodwill' to keep the construction progressing; The GC charging the CO is not going to be gaining goodwill with that client.  And for the GC's out there, sometimes the drawings weren't clear and I'll provide the detail without an additional just like it was an omission.... but there are a lot of GC's fishing for CO's out there by looking for any hole in the CD's/Specs.

Feb 2, 15 10:26 am  · 
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proto

when my friends and I were first studying contracts a long time ago, we reduced the aia construction contracts down to:

1. the gc is always wrong

2. the owner always pays

 

not so sure that's the correct model to pursue per se, but it seemed to fit the materials we were looking at

Feb 2, 15 1:49 pm  · 
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^ From the architects PoV.

From the GC's: the architect is always wrong and the owner pays.

From the owner's: the architect and the GC are conspiring to rob me.

Feb 2, 15 7:32 pm  · 
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