How Do I Price Change Orders?

Price the net effect of the change, not just the obvious extra material. Calculate added labor and burden, materials, equipment, subcontractors, remobilization, schedule impact, overhead, profit, and applicable tax, then subtract credits for work removed from the original scope.

Start with the contract. If it sets unit prices, markup limits, notice deadlines, backup requirements, or a specific method for pricing changes, that method controls the calculation. Do not replace an agreed pricing rule with your normal formula halfway through the job. The original quote should already define boundaries and a process for avoiding scope creep.

Change-order pricing formula

Change-order price =
  added labor and labor burden
  + materials and delivery
  + subcontractors and equipment
  + remobilization and schedule impact
  + allocated overhead
  + profit
  + applicable tax
  - credits for deleted work

Not every change has every line. Charge for a cost only when the change causes it and the contract allows it. Do not add “schedule impact” as a vague cushion or count supervision in labor, remobilization, and overhead at the same time.

What costs to include in a change order

Added labor and labor burden

Estimate the hours by task and role. Include field work plus added setup, protection, cleanup, testing, and direct supervision caused by the change.

Added labor cost = added hours × fully loaded cost for that labor

Use your payroll records to build the fully loaded cost. Keep costs classified consistently. If general supervision is already in overhead, do not also add the same hours as direct supervision unless the change creates identifiable extra work.

For deleted work, record hours that will no longer be performed. Do not credit labor already completed.

Materials and delivery

Include the actual quantity plus appropriate waste for the changed task, supplier price, freight, delivery, and nonreturnable or restocking costs when they apply. Attach the supplier quote or invoice used.

Account for material already ordered under the original scope. A substitution may create both an added cost for the new item and a credit for a returnable original item. Show both rather than hiding the net difference inside one line.

Subcontractors and equipment

Use a written subcontractor quote when possible. For equipment, identify what the change requires: rental, mobilization, operator time, fuel, consumables, or a reasonable internal equipment allocation under your normal cost method.

Do not charge the full rental again if the equipment is already on site for the original work and the change does not extend the rental or alter its use.

Remobilization and schedule impact

A small task can create a real cost when it requires another trip, a second delivery, new site protection, resequencing, overtime, or an extended rental. Calculate the effect instead of charging a generic disruption fee.

Examples include:

• Crew and vehicle time for a return visit
• Added setup, protection, and cleanup
• Direct supervision needed to resequence the work
• An extra rental day caused by the changed schedule
• Premium labor requested to preserve the original completion date

State the schedule effect separately from the price. A change order that adds two workdays should say so even if no separate delay cost is charged.

Overhead, profit, and tax

Apply the overhead and profit method required by the contract. That may be separate percentages, one combined markup, agreed unit prices, or another method. If the agreement is silent, use the pricing policy you can support from your own costs and disclose the method clearly.

Tax treatment depends on the work and jurisdiction. Identify applicable tax as its own line instead of assuming every labor and material item receives the same treatment.

Change-order pricing example

Suppose a customer requests an added installation after work begins. The contract allows a 20% combined markup on documented change cost to cover overhead and profit. These numbers are illustrative, not recommended rates.

The 20% markup replaces separate overhead and profit lines in this example because that is how the assumed contract defines it. Adding overhead again would double-count it.

The written change order should also identify what is being installed and the effect on the completion date. A price without changed scope is not enough to control the work.

Change-order markup vs. margin

Markup is calculated from cost:

Markup percentage = markup dollars ÷ cost

Gross margin is calculated from selling price:

Gross margin percentage = (price - cost) ÷ price

In the example, $320.20 ÷ $1,601 is a 20% markup. The same $320.20 ÷ $1,921.20 is about 16.67% of the selling price. Because the example’s markup also covers overhead, that 16.67% is not pure profit.

Use the contract’s terminology in the change order and your accounting terminology internally. Calling markup “margin” is an easy way to approve the wrong number.

How to price credits and uncertain change-order work

A change can reduce the contract value. Calculate the credit using the agreement’s rules and show what original cost is actually avoided. Consider:

• Work not yet performed
• Material that can be canceled or returned
• Restocking, cancellation, or design costs already incurred
• Equipment or subcontract commitments that cannot be canceled
• Overhead and profit treatment required by the contract

Do not automatically credit the full original line when part of that cost has already been incurred. Do not withhold a valid credit merely because the customer requested the deletion. Show the additions and deductions so the net change can be checked.

When the changed scope cannot yet be measured, use the method allowed by the contract. Options may include:

• An agreed unit price multiplied by verified quantity
• Time and materials with stated rates and daily records
• A defined allowance reconciled against actual cost
• A not-to-exceed amount with written approval for any increase

“We will figure it out later” is not a pricing method. State what will be recorded, who verifies it, and how the final amount will be calculated.

What documentation to attach to a change order

Keep the calculation with the change order:

• Original scope reference
• Description and reason for the change
• Labor hours, roles, and cost basis
• Supplier, subcontractor, and equipment quotes
• Added and deleted quantities
• Remobilization or schedule calculation
• Overhead and profit method
• Tax treatment
• Net price or credit and revised completion date
• Approval name, date, and record

Submit it through the notice and approval process in the contract. Do not begin changed work until you have the approval the agreement and applicable law require. Clear backup makes the decision easier for the customer and gives your crew one authorized number to build from. Use the companion guide when you need to explain the change order to the customer.

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Frequently asked questions

What markup should I use on a change order?

Use the markup method stated in the contract. If the contract is silent, use a consistent method based on your actual overhead and profit requirements rather than copying another contractor’s percentage.

Should a change order include overhead and profit?

Include them when the contract permits them and the pricing method calls for them. Show whether they are separate lines or one combined markup, and do not count costs already included elsewhere.

How do I price a time-and-material change order?

Agree on labor rates, material treatment, equipment rates, recordkeeping, and any not-to-exceed amount before starting. Keep daily records and calculate the final amount using the method stated in the change order.