Change Order Pricing Part 1
March 20, 2003
Change Order Pricing, Part 1
There are many costs that are often overlooked when pricing change order work. Keep the following in mind as you establish pricing for your change orders.
The first step in estimating a potential change order is to fully evaluate and determine all work requirements and situations related to completing the work.
You must identify all items affected either directly or indirectly. This includes requirements of subcontractors, material suppliers, the general contractor, owner, and other entities on the job. Cost keeping, schedule, and other control systems need to be established in order to isolate all costs and impacts related to the change order.
You must now takeoff and estimate the change. It is essential that the estimate be developed with input from your field personnel. Many items affecting cost and schedule may not be as obvious to you as they are to your field personnel--ask for, and rely on, their help.
Change orders will often involve one or more subcontractors or material suppliers. Do not make assumptions about impacts to them. Work with your subcontractors and suppliers to determine their involvement, and have them provide firm prices for their portions of the work.
There are four basic elements in developing the estimate for change order work. They are: (1) Direct Job Costs, (2) Indirect Job Costs, (3) General Administrative Costs, and (4) Job Profit. In estimating a change order, all four elements must be included.
Direct job costs
The direct job cost categories are:
Equipment and material costs are factual, and can be well-established by an accurate takeoff, proper pricing, and correct extensions. Do not take any unit prices for granted. In all probability, materials will have to be purchased at over-the-counter rates, and not at the discounted rates used in your original estimate. This is because your original estimate took advantage of your purchasing power gained through buying large quantities at once.
Subcontract prices are also factual, but it will be necessary for the subcontractor to supply back-up data in order for your firm to sell the change to the owner.
Labor costs must be determined based upon the scope of the change and the current condition of the project. You must quantify how many labor hours you think it will take to perform the change, factoring in all known conditions and creating an allowance for unknown conditions. In addition, you must be sure to include the costs of fringes, taxes, insurance, and burdens with your basic labor rate.
Indirect job costs
It is often believed that indirect costs are part of overhead. This is a gross mistake which can lead to a sizable revenue loss. In spite of what the general contractor tells you, indirect costs are real, and should be properly attributed in change order pricing. Indirect costs which must be recovered include:
1. Indirect labor, onsite
2. Indirect labor, offsite
3. Travel and subsistence expense
4. Job insurance
5. Tool expense
6. Safety expense
7. Equipment rental
8. Job supplies (water, photos, etc.)
9. Job telephone
10. Job offices and facilities
11. Job truck
12. Reproduction costs
14. Permits and bonds
15. Freight charges
16. Warranty (call-backs)
17. Delay penalties
18. Miscellaneous expense
General and administrative costs (G&A)
G&A costs are generally and properly treated as overhead, and are figured as a percentage of total direct and indirect costs. The actual amount of markup allowable usually will have been negotiated in your preconstruction negotiations.
It is important to remember that your firm is owed the agreed-upon percentage overhead for accomplishing the extra work. Overhead must also be considered in two other categories:
1. Additional Overhead: This can be covered by an increased percentage, or as an actual line item listing of costs, such as: Home Office Support--20 hours @ $50 = $1000.
2. Extended Overhead: Overhead costs beyond the planned completion date of the contract can be determined from a projection of rates established by the bid documents or from more current calculations of actual costs on a daily, weekly, or monthly basis.
It is good to keep in mind that if a time extension is not to be considered, that an amount equal to the extended overhead should be included, as this added expense will be incurred by you through acceleration, lost efficiency, space requirements, or similar factors.
Profits are also based upon a percentage markup which was established in your preconstruction negotiations. It is important for you to remember that the percentage markups for overhead and profit will be the difference between making or losing money on change orders.
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