Change Order Pricing Part 2

March 20, 2003

Change Order Pricing, Part 2 of 2

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.

Modifying factors
There will seldom be a change order where the work can be completed on the same cost basis as the original bid. There are many factors to consider, and in order to truly capture all costs and expenses involved in extra work, they will have to be incorporated into the change order estimate. Some of the modifying factors to be considered are:

    1. Overtime requirements--must be computed in the actual compilation of labor costs.

    2. Delays in recognizing changes in pay scales--changes must reflect all projected costs.

    3. Additional non-working or non-productive foreman time--how does the change impact the productivity of your supervisors?

    4. Subsistence costs--actual.

    5. Weather and season--this must be taken into consideration depending upon location, climate and season.

    6. Accelerated purchasing--change orders will usually require a marked increase in purchasing and expediting. In the absence of a clear definition, add a 5-percent factor to all material costs.

    7. Accessibility--change order work will often take place in difficult areas, without the opportunity of easy work areas to level out costs. This must be a prime consideration when figuring costs.

    8. Labor availability--you need to determine the availability of the required labor in your area. There is a good chance some premiums will have to be offered to attract a sufficient workforce.

In addition to these direct effects on change order costs, consideration must be given to certain residual effects on the work, as well as the effect the extra work is having on the basic contract work.

The largest single impact will be negative productivity resulting from a combination of the following factors:
    1. Fatigue and breakdown in established project rhythm
    2. Morale and attitude
    3. Stacking of trades
    4. Concurrent operations
    5. Reassignment of workforce
    6. Dilution of supervision
    7. Learning curve
    8. Errors and omissions--due to attempting to accomplish more work in the same timespan.
    9. Incomplete drawings and specs
    10. Beneficial or joint occupancy
    11. Added financing costs
    12. Site access
    13. Overall logistics

Cost-Plus change orders
The customer will often elect to handle change orders on a cost-plus basis (time and material plus markups). While you might expect that it is impossible to lose money on this arrangement, the opposite happens all too often. The cost-plus change order must be handled very carefully from every viewpoint:

    1. All time and resources used on the cost-plus work must be captured and well-documented. Separate time sheets listing all labor, material, equipment, supervision, and consumables must be maintained and signed by an authorized customer representative on a daily basis.

    2. Indirect costs, which often fall between the cracks, must be incorporated into the change order costs. It is best to keep these on a unit cost basis as opposed to a percentage markup.

    3. Percentage markups for home office overhead and profit will be included.

    4. Actual impacts to schedule and workforce cannot be accurately predicted in this format. This requires and reinforces the need to maintain complete and accurate records. As the work progresses, it will become more evident that impacts are occurring, and it is essential that the customer be kept aware of the impacts and the potential cost ramifications in doing this work.

    5. Modifying factors, as discussed earlier, must also be taken into consideration.

    6. Cost and pricing guidelines for cost-plus change orders will often be included in the contract. Regardless, it is critical that you have reached agreement with the owner’s representative prior to proceeding on any cost-plus work.
In summary, too many actual costs are captured on cost-plus work, and the customer is often reluctant in allowing adequate allowances and markups. Additionally, impacts on schedule and workforce, especially the modifying influences, are hard to document except after the fact. For these reasons, it is better to obtain agreement on lump sum pricing for change orders.

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