CONSTRUCTION CHANGE ORDER MARKUP — OVERHEAD AND PROFIT RECOVERY.
A change order submitted at direct cost only is a change order that performs work below the fully burdened cost of the business. The base contract overhead and profit do not cover additional scope — that scope has to carry its own overhead and profit just like the base contract does. Most contractors either do not know this or do not price accordingly because change order submissions feel like they should be quick and simple. The correct markup calculation takes five minutes. The difference between direct cost and fully marked-up cost on a $40,000 change order is $9,600–$14,400.
The contractors who consistently win change order arguments with GCs are the ones who submit fully documented change orders with clearly calculated markup, not the ones who submit the lowest number and hope for approval.
THE MATH THAT MOST CONTRACTORS GET WRONG ON EVERY CHANGE ORDER.
Change Orders Submitted at Direct Cost Only
The most common change order pricing error is submitting only the direct cost of the work: labor hours times hourly rate, material quantities at cost, equipment at daily rate. No overhead recovery. No profit margin. The change order is priced as if the base contract profit and overhead are somehow covering the additional scope. They are not. The base contract overhead and profit were calculated on the base scope. Every additional dollar of scope that is not marked up for overhead and profit is performed below cost on a fully burdened basis.
What a Properly Marked-Up Change Order Looks Like
Direct labor at fully burdened rate. Direct materials at cost. Equipment at daily operating cost. Subcontractor cost if applicable. Subtotal of direct costs. Overhead markup on direct costs at the current overhead rate — typically 12–18% for most subcontractors. Profit markup on the overhead-adjusted cost — typically 10–15%. The resulting change order price recovers the true cost of performing the additional scope plus a reasonable margin. Some GC contracts cap change order markup — typically 15% overhead and 10% profit — which is the minimum, not the maximum.
What Contract Markup Caps Actually Mean
Many commercial contracts specify a maximum markup for change orders — 10% overhead and 5% profit is common, 15% overhead and 10% profit is less restrictive. These are caps, not targets. When the contract specifies a cap, it means the GC will not pay more than that markup. It does not mean the contractor cannot price at cost plus overhead plus profit and negotiate. Always start at cost plus the correct markup and accept the cap as the floor of the negotiation, not the ceiling.
THE CALCULATION THAT RECOVERS REAL COST PLUS MARGIN.
The bonding implication: Change orders that are priced correctly and collected at the correct markup improve gross margin on the project. Collected change orders also improve the contract value in the WIP schedule, which improves the bonding picture. Change orders priced at direct cost only dilute gross margin and understate the economic value of the work performed.
FREQUENTLY ASKED.
