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 prob-
lems I have encountered: a maximum
combined markup of 5 percent, require-
ments 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 hap-
pens 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 work-
ers in one area is not effective and will
create losses in labor efficiency. In addi-
tion, other trades may be affected by the
change order working in the same area
at the same time. If so, you must fac-
tor 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.
Laboring Over Change Orders
A few things to consider
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.
CA RR has been in the electrical construction business since 1971. He started Carr
Consulting Services—which provides electrical estimating and educational services—in
1994. Contact him at 805.523.1575 or
steve@electrical-estimating.com. I S T
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