C/O Hidden Costs
March 2, 2005
The Real Cost of Change Orders
By: John Zink
A change order can find its beginnings in an engineering mistake, an omission in the drawings, work done out of sequence or any number of other errors. Regardless of the cause, a change order boils down to simply this: the owner asking the subcontractor to fix someone else’s mistake.
Many subcontractors believe that they make excellent profits on change orders. Unfortunately, these contractors often miss that their profits are drained away by “hidden” expenses created by the change that they do not bill for.
When estimators or project managers put together change order requests, many carefully figure their direct labor and materials costs and then tack on the standard 10% overhead and 5% profit that their original contract with the general contractor "allows" them to add. This arbitrary overhead figure cannot begin to cover all the additional costs that are created when there is a change to the scope of the original project.
Often forgotten are the expenses associated with additional tool wear & tear, consumables, extra truck usage and gas, safety materials, extra management time from the PM and foremen, productivity losses associated with moving workers from a planned activity to an unplanned activity, loss of volume discounts for materials, lost opportunity costs, and even the extra drinking water provided on the jobsite. All of these costs are real and MUST be passed on to the person ultimately responsible for the change--the building owner.
The good news is that a change order constitutes a change to the original contract. By asking the subcontractor to make a change to the scope of the original project, the door is opened for other contract changes to be made as well. The original contract may have set overhead rates on change orders, but a change order is essentially a new contract and all terms of this new contract are negotiable--including the overhead rate, profit and even payment terms. A subcontractor who can properly document their expenses can ensure that they will recover their true costs on change orders.
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