If you’re in construction, there are all kinds of unforeseen issues for projects, which can warrant a change order. Change orders are amendments to the original contract. They are used to communicate changes in the project scope, design, or schedule.
Change orders can delay work, but they can be costly if you aren’t diligent when writing up any associated change order fees and costs.
As a contractor, you need to account for changes, so you’re adequately compensated. You also need to make sure there’s clear communication with the client.
Therefore, you will need to organize all the changes with details and pictures (if necessary).
Why Are Change Order Fees Important?
As a contractor, you deserve to be paid for your work. When you run into unforeseen circumstances during a construction project, your labor and material costs go up. This needs to be reflected in the total price of the project for the client.
A change order allows you to legally change a contact, including changes to the payment and its method. It also helps you clearly communicate change order markups to the client, if you have them.
Contractors are sometimes afraid to bid too high, for fear of losing business. However, it is only fair that you are compensated for all labor and materials within the agreed terms.
A change order is your protection and keeps everyone accountable.
Tips for Managing Change Order Fees
As the saying goes, “time is money.” That couldn’t be more true for a construction contractor, so you want to protect your time and money. You don’t want to lose out due to unforeseen circumstances or last-minute design changes from a client.
There are several ways to cover your financial needs on the project without tacking on a huge price tag. Here are a few tips to help communicate change orders and why a change order fee is included.
Break Down the Major Costs by Categories
Changing a contracted project while in the process is costly on various levels.
Think about it. Not only are you missing out on time to complete within a timeline, but it could alter several variables within the project. Unless you’ve considered all possibilities, you could be vulnerable to losing a significant amount of money.
Direct & Indirect Costs
Direct Costs: These costs are expected and pretty straightforward, such as labor, materials, or like expenses.
Indirect Costs: These include factors like overhead, profit, and markup.
- Overhead: This refers to the administrative expenses that you incur running your overall business
- Profit is broken down into “net” and “gross” profit.
- Net Profit: the contractor’s amount after subtracting all costs and expenses.
- Gross Profit: the amount that the contractor makes before subtracting all costs and expenses (with overhead).
- Liability Insurance: the cost of your general liability insurance, which helps keep you protected in the case of accidental damage to a client’s property, customer injuries, and other accidents.
The calculations used are this equation:
Total Annual Revenue $ ÷ Total Overhead $ = Overhead %
“Consequential costs” are trickier to understand, but can also factor into change order fees.
These are the indirect costs that you incur due to a change order. These costs are called “consequential” because they are the consequence of, or reasoning for, other expenses. They occur as a direct consequence of the change order itself.
This could include things like project delays, overtime, crew reassignments, or interference from seasonal weather due to an extended project timetable.
Propose a Higher Price Point
Change order fees are a standard part of the process. The contractor will charge for any changes made to the original contract.
Since this is an expected part of the construction process, then it’s best to start on the higher end with an aggressive price for change order fee, since terms are negotiable.
Change order fees are a way for contractors to offer clients an allowance or upgrade opportunities. This is a great way to build your fees on the bill directly. It doesn’t need to be drastically marked up but has wiggle room if the owner asks to lower the price.
Explain to Clients that Change Orders Require Fees
Some contractors like incorporating the numbers within the change order, and others like to be upfront about fees. We recommend staying transparent throughout the process to avoid legal disputes or unpaid work.
You can develop a percentage required for change order fees and explain it before signing any initial contract. Presenting from the start will make a change order process easier since you can refer back to the price listed in the contract. It’s the ideal way to hold everyone accountable.
Not only will that deter any unnecessary design changes and keep your client set on the agreed terms, but it will maintain a level of transparency.
Keep it Simple with Percentages
You don’t have to propose random amounts of money. Instead, use a small percentage of the overall cost to slightly increase the prices and allow enough for any price cut.
Construction change order fees are typically calculated as a percentage of the total contract price. The portion is usually between 1% and 5%.
If you have to justify the slight increase, it’s easier to explain that the 5% covers the time spent on new changes and delays necessary to keep the project moving. Having a specific percentage backs up the rationale.
Lastly, some contractors add a fixed rate as their change order fee. This isn’t always optimal, though, because some changes might incur greater costs than others.
Streamline Your Change Orders With Software
While unforeseen circumstances can arise, and change orders are expected, you can still stay prepared.
The construction change order process can be simplified by using software that is specifically designed for this purpose. Trak Changes is your simple solution to managing change orders effectively. Start your free trial today and turn change orders from liabilities to assets!
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