Direct and Indirect Costs of Change Orders

Abstract

Pricing of construction change orders is one of the major causes of conflict among owners, designers, and contractors on a construction project. This article analyzes the inclusion and treatment of various direct-cost items in change orders prepared by trade contractors. It also discusses various markup percentages proposed and allowed for overhead and profit. It starts by compiling various direct-cost items and markup percentages from major standard contract documents. It then analyzes direct-cost items in terms of the categories of allowed, disallowed, and maybe/depends based on a weighting system; the markup percentages are also analyzed. The weighting system and the averaging are based on four standard contract documents; legal cases; federal regulations; surveys of 148 electrical contractors and 16 construction owners represented by the National Electrical Contractors Association (NECA), the ELECTRI Council, and the Construction Owners Association of America (COAA); six case studies provided by NECA members; industry standards; and other literature. Finally, the need to consider impact factors and corresponding consequential costs in the pricing of change orders is discussed. The work presented in this paper highlights the prevailing confusion and conflicts related to change-order pricing among owners, designers, general contractors, construction managers, and subcontractors. A major contribution of the research is the development of a standard process of costing change orders by providing change-order specifications for contractors within the project manual Division 1 specification.