WHAT A CHANGE ORDER REALLY COSTS YOU.
Most subcontracts cap what a subcontractor can add to a change order, and the common terms are 10 percent overhead and 5 percent profit on cost, or a flat 15 percent all in. Fifteen percent of cost is a 13.0 percent margin, not a 15 percent margin, because a markup divides by cost and a margin divides by price. Then the cost that markup is applied to is usually understated, because the pricing covers the labor and material of the added scope and not the disruption to the base work, the remobilization, the supervision hours spent pricing and chasing the signature, the small quantity material premium, or the extended general conditions. A change order priced at the cap on an understated cost earns less than the base work it's attached to. That's why a job full of approved change orders finishes below its bid margin with nothing in the field to blame.
Two separate errors are stacked here and they multiply rather than add. The first is arithmetic, and it's the same error that runs through every trade pricing conversation: a margin percentage applied as a markup percentage. The second is scope, and it's worse, because the markup can only be as good as the cost it sits on. Fifteen percent of a cost estimate that's 20 percent light isn't a 15 percent recovery of anything. It's a loss with a profit line printed on it, and it gets signed by both sides because the paperwork is correct.
WHAT IT MEANS.
Change order markup is the overhead and profit percentage a subcontract permits you to add to the cost of added scope, which is a different and usually smaller number than the burdened cost of performing that scope out of sequence.
The cap itself isn't the villain and it's usually not negotiable after award. Change order markup limits appear in the subcontract, in the general conditions, and in the owner contract flowed down through the general contractor, and by the time there's a change to price the language is already agreed. What's still under your control is the cost the percentage gets applied to, whether the base work was bid knowing the cap existed, and whether the time and the schedule effect get billed at all.
It also helps to be clear about what a 10 percent overhead allowance is for. It covers home office overhead, the estimating and administrative time to price and process the change, and the field supervision the added work absorbs. If your own overhead rate, calculated from your trailing twelve months rather than assumed, runs above 10 percent of cost, then the contract allowance is a partial recovery by arithmetic and every change order dilutes the company average. That is a calculation to run on your own numbers.
WHERE THE CHANGE ORDER LOSES MONEY.
The cap is a markup and you're managing to a margin
A flat 15 percent cap on cost produces a 13.0 percent margin, because $100,000 of cost prices at $115,000 and $15,000 divided by $115,000 is 13.0 percent. Ten and five applied in sequence is slightly better and still not 15: cost plus 10 percent overhead, then 5 percent profit on the subtotal, is a 15.5 percent markup and a 13.4 percent margin. If your base work is priced to hold a 20 percent margin, every change order at the cap comes in around 7 points under it, and the more change work the job carries the further the blended result sits below the bid.
The cost the markup sits on leaves out the expensive part
Change work is priced like base work, from units and material takeoff, and that ignores everything the change does to the rest of the job. Out of sequence work runs slower, and slower labor is the whole cost. If a crew installing 100 units a day on base work does 60 a day working around finished trades and stored material, the labor unit cost is 67 percent higher, and a 15 percent markup covers no part of that. Add the remobilization if the crew already left, the small quantity material premium on a 40 foot buy at retail instead of a 2,000 foot buy at contract price, and the supervision hours spent on the pricing itself, and the true burdened cost of a $20,000 change can run past $24,000.
The schedule effect gets performed and never billed
Added scope extends the duration, and extended duration carries extended general conditions: the trailer, the dumpster, the temporary power, the truck, and the superintendent who is still on the job in week fourteen because of work added in week nine. Almost none of that reaches a change order, because it's not part of the added scope in the way a field estimator thinks about scope. It's a time cost, it's real, and it's generally recoverable if it's priced and submitted with the change instead of remembered at closeout when the schedule argument is unwinnable.
WHAT IT LOOKS LIKE IN DOLLARS.
Take $100,000 of change order cost. A 15 percent markup prices it at $115,000, so the profit and overhead recovery is $15,000, and $15,000 divided by $115,000 is a 13.0 percent margin. If you needed a 15 percent margin on that work you had to mark up 17.6 percent, which the cap doesn't allow. The two points are gone before the crew mobilizes.
On $20,000 of change order cost, 10 percent overhead is $2,000. If the 5 percent profit is taken on cost alone it's $1,000, the price is $23,000, and the margin is 13.0 percent. If it's taken on cost plus overhead, as most subcontracts read, it's $1,100, the price is $23,100, and the margin is 13.4 percent. Which of the two you get is a sentence in the contract worth reading before you bid the job.
Keep the $20,000 of listed labor and material and price it at $23,000 under the cap. Now count the real cost: disruption to the base crew, one remobilization, six hours of supervision and estimating time, and small quantity material pricing. Say that brings the burdened cost to $24,000. The change order is a $1,000 loss, not a $3,000 profit, and the swing between what the paperwork says and what the job feels is $4,000 on a $20,000 change.
Base work at 100 units a day and change work at 60 units a day is a 67 percent problem, because cost per unit moves by the inverse: one divided by 0.60 is 1.67, so a 40 percent drop in production is a 67 percent rise in cost. Any markup cap in single digits or low teens is arithmetically incapable of covering a 67 percent increase in unit labor cost. The only place that money can be recovered is in the cost estimate, before the markup is applied.
HOW THE CHANGE ORDER GETS PRICED RIGHT.
The cap governs the percentage and it doesn't govern the cost basis. So the change order gets built from a burdened cost that includes the reduced production rate for out of sequence work, the remobilization, the supervision and estimating hours, the small quantity material premium, and the extended general conditions the added time consumes. Then the contract percentage goes on top of a cost that's true. Same clause, materially different price, and every line of it defensible.
A subcontract that caps change order markup at 10 and 5 is telling you something about the base bid before you submit it. If a job's scope is the kind that generates change work, and the cap sits well under the margin your base work is priced at, the blended result is knowable in advance and belongs in the bid decision. This is a five minute read on the front end that decides several points on the back end.
Extended general conditions, supervision, and disruption are recoverable in most contracts and almost never recovered, because they get raised after the work is complete. They belong in the change order pricing itself, itemized, submitted with the request. A cost that has been submitted and priced in advance is a negotiation. The same cost raised at closeout is a claim, and claims lose.
Change order revenue and change order cost get their own cost codes, so the closed job reports base margin and change order margin as two numbers instead of one blended one. That's the only way to see whether change work is diluting the job or carrying it, and it turns the markup clause into something you can price against next time rather than something you discover after the fact.
THE OUTPUTS, NAMED.
FLAT MONTHLY FEE. NO SURPRISES.
Three tiers, priced by your trailing twelve month revenue. Which one you're in depends on how much of the work you want off your desk. No hourly billing, no payroll, and no add-ons.
Pricing
| Last 12 months revenue | Monthly fee |
|---|---|
| Up to $1M | $1,900 to $2,900 |
| $1M to $3.5M | $2,600 to $3,900 |
| $3.5M to $6.5M | $3,800 to $5,700 |
| $6.5M to $9.5M | $5,100 to $7,100 |
| $9.5M to $12.5M | $6,100 to $8,500 |
| $12.5M to $15.5M | $7,400 to $11,000 |
| $15.5M to $18.5M | $9,400 to $13,500 |
| $18.5M+ | Quoted individually |
Range reflects the three tiers below. Which one you're in depends on how much of the work you want off your desk. No payroll. No hidden line items.
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