November 17, 2005 7:26 AM CST
The Fine Art of Pricing Change Orders
It's an unfortunate fact: Contractors have to "sell" change orders, even changes requested by the owner that everyone recognizes as valid. It's part of the normal course of project management and it's frustrating. And even if the scope of work is not in dispute, the price can be a different matter.
Assuming unit prices have not been established for additional work, these tips might help you overcome defenses to your price.
Provide a Detailed Description of the Additional WorkUse commonly understood terminology that everyone understands. If your work contains trade-specific technical terminology, explain it in simpler terms.
Identify exact location of work and be specific to a fault. Use plan page numbers and details, grid lines, phase, building and room numbers, etc.
State why additional costs are being passed on. Reference the initiating and confirming document or event. What confirmed the owner's acknowledgement of additional costs?
Provide a Detailed Price BreakdownBreaking your price down and showing detail of the work sequentially educates the other side. Also, realize that individual line items now become negotiating points.
The estimating fact at play here is that the more detailed the cost estimate, the higher the price. An added bonus is we're forced to consider the cost for every detail of the work when we break it down and are less likely to forget small elements.
Show Contract "Approved" OH and Profit AmountsInclude the difference between contract "approved" OH and Profit and your real amount for OH&P in your labor and equipment rates.
Agreeing upon unit rates for labor and equipment that are higher than those reflected in the project bid is a must if you hope to recover the difference between what the contract allows for OH and what your actual overhead (G/A) costs are.
Use Real Invoice Pricing for Material Purchased Specifically for This Change Order WorkYou won't need to inflate these prices if you have done what we suggested in the previous section.
Many contractors pad material costs in an effort to make up their OH costs.
Use "Retail Shelf Pricing" for Materials Already on SiteThat is for materials taken out of project inventory.
You'll have to replace this material at a price greater than your original purchase price (assuming quantity pricing at bid time and increased materials costs during the course of construction).
It's never a perfect art or science, but incorporating the above into your change order processes will give you a better chance at winning in the change order game.
About the Author
Contact Paul Stout by e-mail at firstname.lastname@example.org, or visit his website at www.powersummit.com to reach new levels of business success.
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