Construction and remodeling projects always include at least one change order, which is why trustworthy contractors always discuss and include projected costs for change orders in project estimates. The cost of change orders can be a source of contention between contractor and owner, especially if the project owner doesn’t understand what is included in the costs. Helping our clients understand where their money is going is essential to maintaining good contractor-client relationships, and today we hope to shed a bit of light on what goes into the estimated cost of change orders.
Three Types of Costs
Change orders involve three types of cost--direct, indirect and consequential. Here’s a look at what each type of cost entails.
Direct costs are the most tangible expenses and will likely be the smallest source of disagreement between contractor and client because the client can actually see where their money goes. Direct expenses include:
Labor, material and equipment costs.
Additional expenses for time taken to analyze, estimate, discuss, manage and present changes to the project engineer and owner.
Composite labor rate for safety meetings, clean up and supervision, plus if it guarantees work in addition the burdens of the employer.
The two main types of indirect costs are overhead and profit. In most instances overhead and markup costs are a percentage rate usually between 5% and 10% that is predetermined and agreed upon between contractor and client before the actual project begins.
Consequential costs are exactly what they sound like--the costs due to unforeseen or intangible circumstances. These costs include:
Three Methods of Determining Costs
Now that you know the types of change order costs and what goes into them, let’s take a brief look at the three most common methods of determining the estimated cost.
A unit price is a price agreed upon between contractor and project owner in the initial contract. This method can be quite risky for the contractor because the price may not match the scope of work the change orders actually cost. Unit pricing can also work against the project owner if actual change order costs turn out to be lower than the agreed price in the contract, which means you’ll pay for work that wasn’t needed or performed.
Negotiated lump sum price
This method is based on estimated costs with an allowance for overhead and profit, and is usually employed before the project begins. Because this is a fixed price, owners should expect and allow contractors to include a higher markup for accepting the risk.
Cost of work, plus fee
Also known by professionals as Force Account Work, this method for pricing the costs of change orders is used when the contractor and owner cannot agree upon a lump sum or other fixed price. In this case, the owner takes the risk because they are agreeing to costs plus a fee for general overhead and profit that will be paid after the work is complete. To insure your risk pays off with this method, project owners should ask for daily documentation on labor, material and equipment costs.
McCarley Cabinets is a company that values integrity and honesty in our work and our relationship with our clients. We will always work to insure the costs for any change orders in your project are transparent and clearly outlined when you enter an agreement with us. If you’re seeking a cabinet builder you can trust, you’ve found us here at McCarley Cabinets. Give us call now at 662-728-1533 to request your free project estimate.