Pricing Change Orders Like a Pro
Pricing change orders bedevils even the largest contractors. Since change order work is often an unexpected necessity, just the need for a change order creates immediate friction between the owner, the prime contractor, and any subcontractors and suppliers. The reasons for this are many:
- The owner feels he has no negotiating power since the work has to be done, resulting in a sinking feeling that he is being blackmailed;
- The prime contractor is frustrated that the new work is interrupting all the other work, increasing costs, and the owner is making it worse by taking forever to approve the changes;
- The subcontractor provides a fair price, but is asked to reduce it because it wasn’t in the owner’s budget.
- Pricing construction contracts isn’t easy or transparent, and change orders have the same problem.
- The contractor pricing the change order does not want to disclose how it came up with the numbers because it exposes it to having to negotiate on its profit margin.
All of these headaches, and there are many more, cannot always be avoided, but the headache can be minimized if the change order pricing is fair and reasonable. Of course, everyone’s definition of fair and reasonable varies, depending on their position.
The recent edition of “The Contractor’s Compass“, the American Subcontractor’s Association’s monthly magazine, provides an in depth discussion of ways to price change orders. According to “Pricing Change Orders Like a Pro,” its no surprise to most of us that change order or claims include the following: Labor, Equipment, Materials, Indirect costs, Overhead, Profit, and Bond. More specifically, the article says that in pricing a change order, make sure you don’t overloook any of these categories, along with suggested overall cost percentages (which may vary by region or project):
Unloading of materials •
Sorting of materials •
Carrying materials to right location •
Distribution of materials •
Engineering [estimate or actual] •
Supervision (25 percent for foreman 12.5 percent for general foreman) •
The article also gives helpful notes on items that are often overlooked when pricing:
Equipment: “Make sure you have corresponding labor to operate equipment. Rates—Use Bluebook, Caltrans, Corps of Engineers, or whatever is specified.”
Materials: if actual, provide invoices.
Indirect Costs: “These are suggestions to add to your change order: • Small tools—7 percent of labor [negotiate to 4 percent to 5 percent]. • Consumable—7 percent of labor [negotiate to 4 percent to 5 percent]. • Safety maintenance—2 percent of labor. • OSHA tool box meetings—1.25 percent of labor [½ hour / 40 hours]. • As-built fees—1 percent of labor. • Added warranty—2 percent of labor. • Degree of difficulty—5 percent to 10 percent of labor. • Coordination with other trades— Forman supervision in hours. • Change order preparation—hours and rate.
Overhead: Use actual or whatever is specified.
Profit: Ask 12 percent—settle for 10 percent, or whatever is specified. Federal contract—method of computing
Bond: Actual bond costs whatever is specified”
All great things to keep in mind when pricing a change order. The article also gives more specific information regarding what should compose a change order and how to formulate it. Read the whole article here.