Markup on change orders: fee, general conditions and insurance
A change order for a reroute of ductwork arrives at $48,600. The sheet metal subcontractor's cost is $36,000. The rest is markup, layered on by the subcontractor, the construction manager, and whatever insurance and bond percentages the contract allows. Each layer is small. Together they are a third of the change.
The contract sets the rates. The owner's job is to check that the rates were applied to the right base, in the right order, and only once. This post goes through the three markups that appear on most CM at risk change orders and where owners usually find the difference.
Fee
The construction manager's fee on changes is set in the agreement, usually as a percentage of the cost of the change. Under most AIA A133 based agreements the fee on changes is the same percentage as the fee on the base contract, though some owners negotiate a lower rate for changes or a cap on fee for changes below a threshold.
The first check is the rate. The second is the base. Fee should be applied to the cost of the work, which is the subcontractor cost plus any self performed cost plus general conditions if the contract allows. It should not be applied to insurance or bond, and it should not be applied to another layer of fee. Subcontractor markup on their own work is a separate matter, governed by the subcontract, and the owner should know what the subcontracts allow because it flows through.
General conditions
General conditions are the contractor's site overhead: supervision, temporary facilities, hoisting, cleanup, and the rest. On the base contract they are usually a fixed monthly amount or a lump sum. On changes there are three common approaches, and the contract decides which one applies.
No general conditions on changes
Some agreements say that general conditions are fixed and do not change unless the schedule is extended. A change that adds cost but not time gets no general conditions markup. Owners prefer this and it is worth asking for.
A percentage on each change
Other agreements allow a stated percentage on the direct cost of each change. This is simple but it pays the contractor for supervision it is already being paid for. If your contract works this way, check the rate on every change and confirm it is not also being charged as fee.
Extended general conditions for time
Where a change extends the schedule, most agreements allow general conditions for the added days at a daily or weekly rate. The rate should be in the contract or derived from the general conditions line in the GMP. Check that the days claimed match the approved time extension, not the contractor's estimate of it.
Insurance and bond
Builder's risk, general liability, and payment and performance bonds are usually priced as a percentage of contract value, and the contract typically allows that percentage on changes. The rates are small, often under two percent combined, and they are often right. The question is the base. Insurance and bond should be applied last, on the full change including fee, or on the cost of work before fee, depending on how the contract reads. Applying them to a base that already includes them is a common error and it compounds across hundreds of changes.
A fictional $54 million university housing project shows the effect. The contractor applied bond at one percent to the total of each change including bond. The error was a fraction of a percent per change. Across $3.1 million in executed changes it came to a few thousand dollars. Small, but the owner's register caught it because the markup was recorded in layers, and the correction was applied to every later change.
Stacking across tiers
The real money is in tiers. A second tier subcontractor marks up its cost. The first tier subcontractor marks up that total. The construction manager marks up that total. Each markup may be within its own contract. Together they can push markup on a change above forty percent of direct cost.
Many owner agreements limit total markup across all tiers, or limit the number of tiers that can apply markup. Check your contract. If there is a cap, the owner's register should record the direct cost and the total executed amount so the effective markup rate is visible on every change. Costwitness stores markup in layers against the contract rates and flags any change where the effective rate is above what the contract allows. The owner reviews the flag and decides whether the change is correct or needs to go back.
Checks to run this month
- Write the contract rates for fee, general conditions, insurance and bond on changes at the top of your change order register, with the base each one applies to.
- Recompute the markup on the five largest executed changes and compare to what was billed.
- Ask for the subcontractor breakdown on every change above a threshold you choose, so the tiers are visible.
Questions on this
Is the contractor entitled to fee on a credit change order?
Check your contract. Many agreements say that fee is not refunded on deductive changes, or is refunded at a lower rate. Some require fee to come off in full. Record credits in the register with the same markup layers as additive changes so the treatment is visible.
Should markup apply to changes paid from contractor contingency?
Usually not in the same way. Contractor contingency sits inside the cost of work, and the fee on the GMP already covers it. A draw on contractor contingency should not carry a second fee. Check the contract language on contingency use and make sure draws are not being priced like owner change orders.
What is a reasonable total markup on a change?
That depends on the contract and the market, and there is no number that applies everywhere. The useful question is whether the markup on each change matches what the contract allows and whether the same base is being marked up more than once.
In the product
Change order register, GMP baseline, Anticipated final cost. Free tool: Change Order Exposure.
Keep reading
Earlier: Design errors and omissions: recording them so recovery is possible. Later: The change order register: fields an owner should keep. All articles on change orders.
See the cause register on a project like yours.
Thirty minutes on a call. The change order register with causes, the audit trail, and the notice clock, on a fictional project.