Change orders—we love them, and we hate them. Preparing a change order used to be enjoyable. The drawings were clear, the changes were clouded and we were allowed to make a profit. All we submitted was a lump-sum proposal, which was rarely questioned and never outright rejected. Unfortunately, the good times did not last long. Over time, change orders have evolved into something many contractors would rather not deal with.
One of the first changes was in regard to markups. The companies I worked for early in my career had a standard markup for change orders of 15 percent overhead and 10 percent profit. The first indication things were shifting came as a surprise when a change order I prepared was rejected because of improper markups. Unknown to me, the estimator, the contract our company had signed contained language limiting our markups. That was a lesson learned the hard way. We quickly made changes to our office procedures, including a review of contract change order provisions during the bidding process and better interoffice communications regarding the contract requirements.
While I’m on contracts, I think you should never sign one unless it has been reviewed by a lawyer specializing in construction law. Much contract language is difficult to understand and may not mean what you think it means. If the contract language does not let you profit from change orders, and if the customer will not negotiate reasonable requirements, it may be time to walk away from the project.
Here are a few contractual problems I have encountered: a maximum combined markup of 5 percent, requirements to use a labor guide that is too competitive, requirements to use pricing sources that are not realistic, cherry-picking multiple price sources, requiring “invoice” pricing, unreasonable time demands for responses to pricing requests, and excessive requirements for change order submission formats and breakdowns.
In most situations, you will use a different set of labor units for change orders—higher than the ones you use for bidding. This higher set of labor units is not just an attempt to jack up the price of the change order. It is a proven fact that labor production suffers when change orders are issued. Work in some areas may need to be stopped, crews may have to be reassigned and new materials may have to be ordered. This is all disruptive and will cause a decline in production.
Deductive change orders can be difficult to deal with. If you are required to submit detailed pricing sheets with labor units for each type of material, your customer will be able to see where you deduct work with lower labor units than you use for new change order work. If you did not sign a contract obligating you to use a specified source for change order labor units, you should be able to negotiate the use of two different sets of labor units.
Another item related to labor is schedule compression. It often happens that a change order adds new work in an untimely manner, requiring additional manpower to complete the project on time. Once again, this affects productivity. Having too many workers in one area is not effective and will create losses in labor efficiency. In addition, other trades may be affected by the change order working in the same area at the same time. If so, you must factor your labor for the losses or include a clause in your proposal requiring additional time to complete the work. Furthermore, don’t forget to use the proper labor rates if the new schedule requires overtime or shift time.
A full analysis of the change order is a must. It’s easy to overlook new costs if you do not spend enough time going over the change documents. The first thing I do is copy all of the change documents for the foreman on-site. This is needed to assess the impact of the change on the existing and future work.
For instance, if you need to add conduits and outlets in walls that are already covered, your cost will increase significantly. Also, remember that engineers are fallible. I worked on a change order in which the engineer missed an important detail: the added circuits overloaded the local panel. The added load was enough to have a ripple effect all the way back to the main switchboard, requiring a new coordination study. This was yet another expense. Another problem frequently happens when the engineer doesn’t consider National Electrical Code-required clearances for new equipment.
I will get into some of the more advanced aspects of change orders in upcoming columns.
(Editor's Note: Read the next part in this series here.)