Reviewing and Negotiating Change Orders

By Jennifer dos Santos

Change orders are often an unavoidable reality of construction projects, especially renovation projects where there can be unknown conditions.  Change orders are rarely “happily received” by Designers, Owners, or Owner’s Representatives, but many Owners do not realize what to look for when reviewing a change order proposal or that they are most often negotiable.  When a change order is presented, you should not feel as though your back is against the wall or that you are at the mercy of the Contractor’s first price.

The following summarizes some basic information that everyone in a position to review change order proposals should be aware: 

The first step is to feel comfortable with the need for the work or the additional cost.  You should not be afraid to ask for further explanation.  Remember, this is your, or your client’s money they are asking for and you have every right to ask as many questions as you deem necessary to understand the request.  Some questions you may want to ask include:  What are the impacts/possible impacts to your project if the change is not accepted?  What are the trades that are involved in carrying out the work of the change order?  What are the materials that are required to carry out the work?  Why does the Contractor feel that they should not have included these costs in their original contract?  Was this work shown on the plans or described in the specification?  Is it required by the code?

The next step in reviewing a change order is to be sure that it is presented in a format that you can easily follow and understand.  The format should include a breakdown of labor, materials, equipment, and subcontractor work.  The materials and subcontractor costs should be itemized with proper substantiation of associated costs (vendor/subcontractor quotes or invoices should be attached).  Additionally, check prices!  Comparison prices can usually be obtained with a few simple phone calls.  The labor breakdown should include the number of workers, the number of hours required, and the hourly rates.  Next, any special equipment that is required to carry out the work (i.e. special lift, staging, etc.) should be listed with the associated rental costs.  Again, these costs should be substantiated with vendor quotes or invoices. 

The next step is to carefully compare the work of the change order to the original scope of work to be sure that any work no longer needed is properly credited.  If the work of the change order is replacing any contract work, you want to be sure that the proper credit is applied to help offset some of the additional costs.  When reviewing the credit, be sure to rely heavily on the Schedule of Values and request the same information to substantiate the cost of the credit as indicated above.  Again, it is important to understand the work.

The last items are overhead and profit mark-ups.  You do not have to accept a contractor’s standard mark-up.  You have the right to negotiate both, but most often it is the profit that is negotiated.  10% overhead is an industry standard, however it may also be negotiated under some circumstances.  If the change order includes work of a subcontractor, you may not want to authorize 10% of profit mark-up to your General Contractor as well as the subcontractor.  This results in a total mark-up of 44% on the work of the subcontractor which is excessive to any Owner.

The best protection is to have your design professional prepare your construction documents and to protect your interests during construction.  These are practices that they are more familiar with and may be better equipped to manage.