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Construction Programs & Results Inc

We Like to See The Good Guys Win!

Overhead and Profit on Change Orders

by Michael Stone

There are risks involved in signing a contract that limits you to a 10% overhead and profit on additional work orders. A note we received recently:Overhead and Profit on Change Orders #MarkupAndProfit

"I have a question. Many of the projects we have contracts on, with a GC or a CM, are with Colleges and Universities. It is written in the contract specs that you can only have 10% OH&P on any change.

Recently one of our projects that we already have a contract on put out an ASI that asked to add flooring in every office and corridor in several stories of the building. This ‘add' is worth significantly more than our contract. I am being told that I have to stick to the 10%.

Since we already have a contract, and the 10% is stipulated in the contract specs, do we have any option other than to go with the 10%?"

I understand why some owners and/or architects want language that limits the markup on change orders in the contract. It's not unusual for a contractor to low bid a project in order to "win", then overcharge on the change orders to break even or make their profit.

However, those change orders are often items that should have been specified in the original bid. If owners and/or architects write complete bid specifications upfront, they don't need to control pricing on change orders because fewer changes are necessary.

This is a different situation. Here, the owner is requesting a change that exceeds the value of the original contract in order to hold the contractor to the agreed 10% overhead and profit. It's dishonest. I'll even call it a scam; I wonder if it was planned before they ever asked for bids on the original work. The writer knows they'll lose money trying to do a job with a 10% overhead and profit, which is why they asked the question.

You shouldn't sign a contract that stipulates what you can charge, even if it's just on the change orders. I think it's price fixing, but owners/architects or project managers argue it isn't. Whatever you want to call it, do you really want to work for anyone who tells you want you can charge for your work?

I can't address the legal side of their question. Each state has different laws pertaining to contracts, so I advised the writer to look for an attorney that specializes in construction law and ask for their opinion. You want a specialist in construction law; a general practitioner might not know the nuances of the law as it pertains to your business.

As far as options go, I'd insist a new contract be written, not an additional work order. The only other option that I'd consider reasonable is to refuse to do the additional work. Some great opportunities aren't that great; let someone else deal with this client.

You need to stay in control of the major decisions that impact your business, and that includes what you charge for your work. When you cede that control to a client, for whatever reason, you're at risk. Be careful what you sign.

 

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