Change order pricing review: what the owner checks before the cause is settled

A change order proposal arrives with a number on it. The owner's representative reads the number, finds it high, and opens a negotiation about the price. Three weeks later the price is agreed at 15 percent less, the change order is executed, and nobody has asked whether the owner should have been paying for it at all.

The order matters. The cause of a change decides which fund pays and whether the GMP moves. The price decides how much. An owner who negotiates the price first has accepted the cause by conduct, and a contractor who was unsure whether the item was a design gap or an owner change now has an executed change order that says it was the owner's.

First the cause, on the record

The first entry for any proposal is the cause as the owner reads it, with the event date and the basis: which drawing, which assumption in the amendment, which site condition. On a fictional $14 million branch library, a proposal for $86,000 of additional structural steel at the entry canopy is either an owner scope change, if the owner asked for a larger canopy, or a design gap, if the drawings under-sized the members, or a coordination item, if the steel and the glazing did not fit together. The three have three different payers.

The owner should write down which it is, or that it is unclassified with a date to decide, before the price is looked at. If it turns out to be a contractor risk, the price review is still worth doing, because the contingency draw will be recorded and will affect the savings pool, but it is a different conversation.

Then the price, in four parts

A change order price on a GMP job is built from labor, material, equipment and subcontractor cost, plus the markups the agreement allows. Each part is checked differently.

Quantities are checked against the drawings or the site. Twelve tons of steel for a canopy that scales at seven is a question, and it is a question about arithmetic, not about the contractor's honesty. Labor is checked against the rates in the agreement, which usually fixes them or fixes the method, and against a plausible crew and duration. Material is checked against quotes, which the owner is entitled to see. Subcontractor cost is checked the same way, one layer down.

The markups

The agreement sets the markup on changes: a percentage on the contractor's own cost, a smaller one on subcontracted cost, and usually a statement about whether general conditions and fee are added on top or are included. A proposal that applies the subcontractor markup to self-performed work, or that adds a general conditions percentage the agreement says is already in the fee, is wrong by a few percent. On $86,000 that is a few thousand dollars. On a job with sixty change orders it is real money, and it is the same few percent every time.

Credits and deducts

Changes that remove scope are reviewed in reverse and with more care, because the credit offered is often smaller than the cost that was carried. If the owner deletes the canopy entirely, the credit should be the steel, the labor, the subcontractor cost and the markup that was in the GMP line for it, not the contractor's estimate of what it would have spent. The GMP breakdown and the buyout record say what was carried. The owner with those to hand can check the credit. The owner without them takes the contractor's figure.

Time and the price

A change that adds days adds general conditions, and the proposal may include them. Whether it should depends on the agreement and on whether the change is on the critical path. An extra week of site supervision on a change that could be done alongside other work is not a cost of the change. The owner should ask for the schedule fragment that shows the days, and record the days claimed alongside the price, because at closeout the total of days claimed against the total extension granted is a number worth having.

The record after execution

When the price is agreed and the change order executed, the register carries the cause, the event date, the notice reference, the agreed price, the parts it was built from, the days if any, and the fund it drew on. That is more than most owners record. It is what makes the next proposal from the same subcontractor, with the same labor rate error, a two minute check instead of a new negotiation.

In the product

Change order register, GMP baseline, Buyout tracker. Free tool: Change Order Exposure.

Keep reading

Earlier: Contingency at the midpoint: the numbers that should be true when the job is half built. Later: Allowance or contingency: which fund a surprise should draw from. All articles on change orders.