Change order negotiation: 12 questions to ask about price, markup and OH&P

Ask for structure, not a discount

"Can you do better on the price?" invites a yes or a no. A question that asks for a document invites an answer you can check. The twelve questions below ask for the same information that public owners require before they pay for a change, so none of them is unusual to a contractor who has done public work.

Two published clauses are used as the reference throughout: the General Services Administration's Equitable Adjustments clause (GSA) and the Department of Veterans Affairs' changes clause (VA). They are the terms of public contracts, quoted because they are published and specific. They do not apply to a private job unless your contract says so.

A useful way to open: "I want to approve this quickly, and I need a clear cost basis to do it."

Scope: questions 1 to 3

1. What changed, and in which document? A federal change order changes the specifications, drawings or method of work (FAR 52.243-4). Ask which drawing, specification or instruction this change order comes from.
2. What is being removed, and where is the credit? GSA requires the contractor to "separately identify each item of deleted and added work."
3. What does this do to the schedule and the payments? GSA's breakdown includes any change to the completion time. California requires a home improvement change order to state its effect on the schedule of progress payments (Business and Professions Code 7159).

Labor: questions 4 to 6

4. How many hours, by trade? GSA asks for the "quantity of labor hours" by trade and occupation; VA asks for labor costs "separated into trades."
5. What is the hourly rate, and what is in it? GSA asks for a "burdened hourly labor rate, together with itemization of applied labor burdens," kept separate from overhead and profit. If the rate already includes overhead and profit, question 9 matters more.
6. Which task does each block of hours belong to? VA requires labor costs to be "identified with specific material placed or operation performed."

Materials and equipment: questions 7 and 8

7. What are the quantities and unit prices, and who is the supplier? GSA asks for material cost by "supplier, material description, quantity of material units, and unit cost."
8. What equipment is charged, and for which operation? GSA asks for equipment cost "identified with material to be placed or operation to be performed."

Markup and OH&P: questions 9 to 11

9. What are the overhead rate and the profit rate, and what subtotal is each applied to? GSA has each firm propose "an overhead rate, profit rate, and where applicable, a bond rate and insurance rate." Overhead applies to the direct costs of the work that firm performs; profit applies to its direct costs plus that overhead.
10. Does the subcontractor's price already include its overhead and profit, and what are you adding to it? Under GSA's clause a contractor is not allowed "overhead or profit on the overhead or profit received by a subcontractor," and its markup on a subcontractor's direct costs is half its own rates, "not in excess of ten percent when combined."
11. Is anything charged both inside OH&P and as its own line? VA treats supervision, small tools, estimating and coordination of changes as included in the overhead and fee percentages, with "no separate allowance." GSA does not allow bond or insurance rates "if the associated costs are included in the calculation of a firm's overhead rate."

Your contract may set different rules, or none. The questions still work, because they ask the contractor to state the rule being used. For the percentages that public contracts publish, see typical change order markup; to test the arithmetic on your own document, see how to check overhead and profit.

Timing: question 12

12. If the work has to start now, can we agree a not-to-exceed amount and settle the price from the records? Federal policy is to price a change before it is signed, and when there is no time, to negotiate "at least a ceiling price" (FAR 43.102). See when to approve a change order right away.

A worked example

These numbers are hypothetical, chosen for easy arithmetic. They are not benchmarks, and the outcome is an illustration, not a prediction.

A contractor sends a lump-sum change order for $8,400. Questions 4 to 9 produce this breakdown:

Line	Basis	Amount
Labor	40 hours at $70.00	$2,800.00
Materials	Supplier quote	$1,900.00
Subcontractor	Electrician's quote	$2,100.00
Subtotal		$6,800.00
OH&P	15% of $6,800.00	$1,020.00
Supervision	8 hours	$580.00
Total		$8,400.00

Question 10 asks whether the electrician's $2,100 already includes the electrician's own overhead and profit, and why the full 15 percent is applied to it. Question 11 asks why supervision is a separate line if overhead covers supervision. If the contractor agrees that supervision belongs in overhead, the total becomes $7,820.00. Whether the contractor agrees depends on the contract and on the answers. The questions turned one number into a breakdown that can be checked line by line.

Checklist before you sign

• The change is tied to a drawing, specification, instruction or site condition.
• Removed work is listed, with its credit.
• Labor shows hours, trade and rate; materials show quantity and unit price.
• Each markup shows its percentage and the subtotal it applies to.
• Nothing appears both inside OH&P and as a separate line.
• The effect on the completion date and on payments is written down.
• The change order is signed before the work starts.

Common mistakes

• Arguing about the total before seeing what it is made of.
• Asking for a percentage off instead of asking what the percentage is applied to.
• Accepting "that is our standard markup" without asking where the contract says so.
• Agreeing by text message and sorting out the paperwork afterwards.
• Treating a public agency's markup allowance as a market rate for a private job.

Questions people ask

Is 15% overhead and profit typical on a change order? No public source establishes one typical figure for private work, and published contract terms vary. The percentages public agencies publish, and what each covers, are in the typical change order markup guide. In a negotiation, asking what the 15 percent is applied to is more productive than debating the 15.

Is 10% overhead and 5% profit the same as 15%? Not exactly. When profit is applied to cost plus overhead, as the GSA and VA clauses specify, 10 percent and 5 percent compound to 15.5 percent of direct cost.

Is it common to credit back overhead and profit on deductive change orders? None of the public sources used here says how common it is in private contracts. In the VA clause, "a reasonable allowance for overhead and profit are properly includable as part of the downward adjustment for a deductive change," with the amount "subject to negotiation." Check what your contract says about credits.

Will these questions delay the project? They ask for information the contractor used to build the price. Question 12 covers work that cannot wait.

This guide is informational. It is not a professional estimate or legal advice.