ESTIMATING BY STEPHEN CARR
During the bidding process, plan how
you are going to process a change order.
This is the time to review the change-order provisions in the proposed
contract. I recommend you have a lawyer who specializes in construction law
review every proposed contract. Most
contracts are designed to shift risk from
the general contractor to the subcontractor, so spend time with the sections
defining what costs you are allowed to
recover in your change-order pricing.
There are two sources of subcontract forms: those sponsored by industry
associations and the proprietary forms
developed by general contractors. The
two most-often-used association sponsors are the American Institute of
Architects (AIA) and the Associated
General Contractors (AGC). As you can
imagine, each favors its own members.
As for independently developed subcontract forms, there may be as many
different contracts as there are general
contractors. However, many of them use
language borrowed from other sources.
Most contracts delineate which costs
and markups are allowed for change
orders. There are three categories
of change order costs: direct costs,
including labor, material, equipment
and other costs directly related to the
change order; indirect costs, includ-
ing overhead expenses and profit; and
the costs of other impacts, such as lost
labor productivity, delay costs and
the cost of filing claims. Unsurpris-
ingly, most of the available contracts
do not allow for all of the costs you
may experience due to a change order
Of the three categories, you might
think direct costs are the easiest to
recover, but this is not always the case.
Using the AIA A201 2007 contract as a
guide, material, equipment, rental and
transportation costs are allowed. However, small tool costs are not allowed.
Storage, handling, inspection, testing,
temporary facilities and waste cleanup
costs are not mentioned.
Labor costs can also be a problem. The
AIA contract allows for wages, burden
and on-site supervision, such as a general
foreman. It does not identify office supervision, room and board, or travel costs.
Let’s look more closely at material costs.
When I was a junior estimator working for a small electrical contractor, our
standard procedure was to use Trade
Service Publication’s Column 3 in our
change orders. This was the wholesale
price every EC could pay for material.
Any discounts we obtained were kept
for the company. Now, many contracts
require the subcontractor to include all
of their discounts in their material pricing, including cash discounts earned for
paying the material provider’s bill on
time. Some contracts require copies of
invoices to prove your material pricing is
at the lowest possible level.
Another material cost to consider is
restocking and cancellation charges. I
have often had to fight for reimburse-
ment of these costs. It does not make
sense to me that owners do not think
they are liable for the costs related to
retuning or canceling material, when
they are the ones making the changes.
Now for a closer look at labor costs. Every
contractor I have ever worked for had the
same standards for applying labor units to
estimates. They used a “competitive” set
of labor units for bidding new work. They
also had a set of labor units for work that
took more time; including change orders.
Change orders are disruptive and most
often cause a loss of productivity. This is
another area where contracts try to limit
the costs a subcontractor can recover in
a change order. One of the most common
phrases I see in a contract requires the
use of a published labor guide, which
often contains only competitive labor
units not meant for change orders.
Some contracts go as far as defining
what costs can be included in your labor
rate. A customer called me about a contract he had signed that did not allow
for some of the burden and fringe costs
that are part of a standard union labor
rate. His company was losing money for
every hour of work he performed on a
I hope I have made it clear how
important it is to have contracts reviewed
by a construction lawyer, solely because
of change-order language. Next month,
we will discuss overhead, profit, impact
factors and consequential costs.
A Little Light Reading
Laboring over change orders, part 2
LAST MONTH, I wrote about basic considerations for processing change orders. Now,
it’s time to dig into the details. Let’s start from the beginning.
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 email@example.com. I S T