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M. Syal _2010
CHANGE ORDER OVERHEAD %
GUIDELINES
Progress Report
ELECTRI International
Prof. Matt Syal, Ph.D., LEED® AP
Joseph Diffendal, Graduate Assistant
Construction Management
School of Planning, Design and Construction
Michigan State University
January 2013
1
M. Syal _2010
Objectives
• Classify various cost items as
direct costs and overhead costs
• Survey the NECA members for
overhead cost % related practices
• Develop recommendations for
overhead cost % for change
orders
2
M. Syal _2010
Task Force Members
3
Earl Restine, Jr. Fuller Electric Anthony Maloney Koontz-Wagner/NECA Indiana Michael Abbott Abbott Electric Bob O'Donnell Greater Toronto ECA Don Campbell NORCAL NECA Greg Long NAPA ECT Tim Schultheis Schultheis Giovanni Marcelli Accubid Brad Giles Giles Electric Jerry Hayes United Electric Co. David Kurtz Shaw Electric Arthur Ashley Ferndale Electric Todd McCormick McCormick Systems Christopher Foster Whitehead Electric Henry Brown Miller Electric Daniel Divane Divane Bros. Electric Co. James DiLullo Dynalectric Co. Allen Estes,III Oles Morrison Brandon Booth Howard & Howard Michael Crawford NECA Michigan Dan Tripp NECA-SMC Rick Mckinney MicKinney Associates Kyle Schemitsch ACCI
Sylvia Selwood ELECTRI Russell Alessi ELECTRI
M. Syal _2010
Direct Costs Items and Rates Identified in
Major Contractual Documents
4
M. Syal _2010
Classification of Costs
5
Direct Costs Overhead Costs Labor Home office overhead
Material costs Off-site supervision
Site supervision Change order preparation, negotiation and associated travel Handling, carrying and shipping costs
Restocking and/or cancellation costs Time delays
Performance and payment bond premiums Guaranty and warranty durations
Temporary protection Additional performance and payment bond premiums
Temporary heat, light and power Property taxes, business licenses, auto insurance Safety equipment staging, scaffolding and lights
Items directly related to the changes Dues and subscriptions
All applicable taxes Postage and courier (non-job related) Material escalation
Labor escalation Advertising and telephone
Clean-up and disposal Legal and accounting fees
Estimating/Engineering Sales and marketing
As-built drawing and schedules President's salary and benefits
CPM revisions and updating Sales force salaries and benefits
Cost analysis Support Staff salaries and benefits
Purchasing and Expediting Dispatcher's salary and benefits
Timekeepers Support staff salaries and benefits
Mobilize and demobilize Purchasing salaries and benefits (estimating only) Contract Administration
Audit cost contingency Estimators salaries and benefits (except for change orders) Travel, room and board expenses
Permits and licenses fees
Small tools
Equipment and tool rental
Job-related insurance, warranty and interest
Job site office and storage rental
Job site equipment, furniture and supplies
Salaries and benefits for job site management and clerical staff
M. Syal _2010
Survey of NECA Members on
Overhead Costs % Related Practices
• Survey Conducted during Mid December -
January 8
• 181 Respondents
• In addition, some shared case studies
• A quick peek into the survey data on next
3-4 slides
6
Types of Respondents
Building & Low Voltage/Control
Building
Line, Building & Low Voltage/Control
Low Voltage/Control
Line & Building
Line Contractor
Low Voltage/Control & Other
Other
Building & Low Voltage/Control (42%)
Building (38%)
Line, Building & Low Voltage/Control (7%)
Low Voltage/Control (4%)
Line & Building (3%)
Line (3%)
Building, Low Voltage/Control & Other (2%)
Low Voltage/Control & Other (0.5%)
Other (0.5%)
Location of Respondents
Northeast 21%
Southeast 9%
Midwest 31%
Southwest 5%
West 30%
Canada (Ontario) 4%
U.S. by Region
U.S Nationwide - 13 Responses Mexican Territory - 1 Response Caribbean - 1 Response
Average %:
Public Work - 14.80% Private Work - 15.44%
0
10
20
30
40
50
60
70
Under5%
6 -10%
11 -15%
16 -20%
21 -25%
26 -30%
Over30%
Nu
mb
er o
f R
esp
on
ses
Typical Overhead and Profit %
Typ. Public Work
Typ. Private Work
Typical Overhead
and Profit %
0
10
20
30
40
50
60
70
Under5%
6 -10%
11 -15%
16 -20%
21 -25%
26 -30%
Over30%
Nu
mb
er o
f R
esp
on
ses
Maximum Overhead and Profit %
Max. Public Work
Max. Private Work
Average %: Public Work - 16.71% Maximum = 35% (2 Responses) 30 - 34% (3 Response)
Maximum Overhead
and Profit %
Private Work - 18.04%
Maximum = 50% (1 Response)
30 - 49% (6 Response)
0
10
20
30
40
50
60
Under5%
6 -10%
11 -15%
16 -20%
21 -25%
26 -30%
Over30%
Nu
mb
er o
f R
esp
on
ses
Minimum Overhead and Profit %
Min. Public Work
Min. Private Work
Average %: Public Work - 9.45% Minimum = 0% (6 Responses)
1 – 5% (31 Response)
Minimum Overhead
and Profit %
Private Work – 9.25%
Maximum = 0% (6 Responses)
1-5% (39 Response)
M. Syal _2010
Plans for the Next Phase
• Would welcome more case study
examples
• Analyze the survey data and case studies
• Compile similar data published by other
industry sources
• Develop guidelines for:
– items to be included in direct costs and
overhead costs
– overhead cost % for change orders
12
M. Syal _2010
NEED CASE STUDIES?
• Items Needed
– Contract governing the change order
– Initial change order with line item costs
– Final approved change order with line item
costs
Note: If possible, provide best, typical and
worst case scenarios
13
M. Syal _2010
THANK YOU
Matt Syal
Joe Diffendal
Michigan State University
syalm@msu.edu
M. Syal _2010
15
M. Syal _2010
16
M. Syal _2013
Prof. Matt Syal, Construction Management, MSU
Overhead and Profit Percentages
• Most standard agreements leave the overhead and profit % undefined and up to negotiations
• 18 agreements were found with overhead and profit defined
General Contractors % 7 to 20%
Subcontractor % 7 to 15%
Pass-through % 3 to 7.5%
Many contracts limit the percentage for overall overhead and profit
15 to 25%
Different % for different types of costs Direct Labor 10% (16-18%)
Material Costs %5 (6-7%)
M. Syal _2013
Prof. Matt Syal, Construction Management, MSU
Costs of Change Orders
Consequential Costs Labor Related
• Stacking of trades, interferences and disruptions
• Fatigue, mistakes, errors and stress
Delays and Acceleration • Capacity, opportunity costs, retainage release
and cash flow
Field Conditions • Weather, congested areas and working in finished
areas
Overhead Costs
• Home office
• Officers salaries and benefits
• Staff Salaries
• Change order preparation
Direct Costs
• Labor costs
• Material and equipment
• Taxes and fees
• Facilities and utilities
M. Syal _2013
Prof. Matt Syal, Construction Management, MSU
Costs of a Project vs. Change
Order • Consequential costs are consider during the
bidding process
• In a change order process consequential
cost are typically difficult to justify. Many
agreements don’t allow for these types of
costs.
Change Order
Pricing
Direct Costs
Overhead & Profit %
Consequential Costs
Original Project
Pricing
Bid
• Direct Costs
• Overhead & Profit
• Consequential Costs
M. Syal _2013
Prof. Matt Syal, Construction Management, MSU
Specific Electrical Contractor
Issues Electrical Contractors feel that they are treated unfairly on change orders because:
1. They are typically a first or second tier contractor Overall Overhead Profit Allowed = 15%
• Tier 0: General Contractor 5%
• Tier 1: Building Electrical Contractor 5%
• Tier 2 :Low Voltage or Controls Contractor
5%
2. Electrical contractors’ material costs are typically much less than other contractors
• Higher percentage of the change order is labor (requires more overhead)
• Typically standard materials are used and no fabricated materials are required
M. Syal _2013
Prof. Matt Syal, Construction Management, MSU
Change Order Project
So what are the major factors in change order
pricing?
1. Overhead and profit percentages
2. Direct costs, which costs are included/excluded
3. Overhead costs, which costs can be included
4. Consequential costs, how to calculate or justify
5. How to present to costs in a manner which the client
will accept
M. Syal _2013
Prof. Matt Syal, Construction Management, MSU
Project Methodology
• NECA members recently responded to a survey
Link: www.surveymonkey.com/s/HNLL6R8
• Evaluate survey data
• Case studies will be evaluated
• Interviews with GC and owners
• Interviews with other types contractors
Final product
• Provide summary of findings and guidelines for the electrical contractors on change orders
M. Syal _2013
Prof. Matt Syal, Construction Management, MSU
Comparative Table of Case
Studies Case Study Case 1 Case 2 Case 3 Case 4 Case 5
Provided By Kyle S. Jerry H. Jerry. H Bob O. Rick M.
Company ACCI United Electric United Electric McKinney
Assoc.
Share O&P %
Percentage Yes
Contractor % 15 10 15 10 15
Subcontractor
% 10 10
Pass-Through
% 5 5
Tier 2
Costs Identified Yes Yes Yes Yes No
Costs Included Yes Yes Yes No No
Costs
Excluded Yes No No Yes No
Comments Excluded
Costs
Labor Rates Include
Overhead Excluded
Costs Labor Rates
M. Syal _2013
Prof. Matt Syal, Construction Management, MSU
Specific Change Order Case Study
I • Contractor % = 15%
• Subcontractor % = 10%
• Pass-through % = 5%
• Tier = not defined
• Direct Costs
• Labor
• Materials
• Rental
• Premiums for all bonds and insurance
Quotes
“Consequential costs are hard to determine.”
“If you handled your consequential costs well you
make the most profit!”
Kyle Schemitsch
ACCI
(813)978-0101 ext. 33
• Overhead Costs
• Supervision wages
• Timekeepers
• Watchman
• Clerks
• Hand tools
• Incidentals
• General office expense
• All other expenses not include in “cost”
• Items Excluded
• Their were $8,000 of misc. material and
consumables
• 60 quotes for the change order
M. Syal _2013
Prof. Matt Syal, Construction Management, MSU
Specific Change Order Case Study
II • Contractor % = 10%
• Labor Rate was negotiated with overhead included (% unknown)
• Subcontractor % = not defined
• Pass-through % = not defined
• Tier = not defined
• Direct Costs Included
• Clean up
• Material Handling
• Project Manager
• Safety
• Transportation
• As Built Drawings
• Job Truck
• Drawings
• Materials
Jerry Hayes (President)
United Electric Company, 1270 Kennestone
Circle, Marietta GA, 30066
(770)499-9292
• Items included in pricing but excluded from
overhead and profit markup
• Bonding
M. Syal _2013
Prof. Matt Syal, Construction Management, MSU
Specific Change Order Case Study
III • Contractor % for Overhead = 10%
• Contractor % for Profit = 5%
• Subcontractor % = not defined
• Pass-through % = not defined
• Tier = not defined
• Direct Costs Included
• Materials and Taxes
• Electrician
• Supervisor
• As Built Drawings
• Testing
• Delivery & Pick Up
• Job Truck
• Warehouse Truck
• Permit
• Clean Up
Jerry Hayes (President)
United Electric Company, 1270 Kennestone
Circle, Marietta GA, 30066
(770)499-9292
M. Syal _2013
Prof. Matt Syal, Construction Management, MSU
Specific Change Order Case Study
IV • Contractor % = 10%
• Subcontractor % = 10%
• Pass-through % = 5%
• Tier = not defined
• Costs excluded from change orders
• Project Staff
• Field Engineering
• Staff Travel, Meal and Accommodations
• Temporary Offices/Furniture/Equipment
• Telephone, Internet, Fax & Radios
• Insurance, Bonds, Permits and Licenses
• Temporary Fence & Hoarding
• Plant Depreciation
• Safety
• Daily & Final Clean up
• Partnering
Bob O’Donnell
• Costs excluded from change orders continued
• Winter Conditions
• Temporary Enclosures/Partitions/Stairs
• Temporary Lights, Service and Power
• Temporary Water Service
• Temporary Access
• Sanitation
• Temporary Fire Protection
• Project Sign
• Progress Photos
• Professional Services
• Printing and Reproductions
• Architect’s/Owner Trailer
• Flagmen/Off Duty Police
• Quality Control And Safety staff
M. Syal _2013
Prof. Matt Syal, Construction Management, MSU
Specific Change Order Case Study V
• Contractors % = 15% for overall overhead and profit
• Subcontractor % = not defined
• Pass-through % = not defined but shared
• Tier = second contractor
• The issue with this change order was that the labor
rate
• Contractor contract costs = $89,974.00
• Contractors cost of work = $79,500.00 (12% for overhead and profit)
• Owner paid $66,682.53 (74% of the prevailing labor rate)
Rick McKinney
Lloyd F. McKinney Associates, Inc.
25350 Cypress Avenue, Hayward, CA 94544
(510)783-8043
M. Syal _2013
Prof. Matt Syal, Construction Management, MSU
CASE STUDIES?
1 Please Provide
2 Please Provide
Answers
3
4
5
6
%
7.A % for Tier 0: General Contractor %
7.B % for Tier 1: Subcontractor %
7.C % for Tier 2: Sub-subcontractor %
11
Note: provide best, average and worst case scenarios.
10
Contract agreement governing the change order
Was the overhead and profit % negotiated or defined in the agreement?
(Negotiated/Agreement)
If yes to question 5, what was the overall overhead and profit % for all
contractors?
If yes, please specify the items which were not allowed.
If yes to question 5, how was the overhead and profit % divided?
Were consequential costs considered? (Yes/No)
Change order breakdown with line item costs
Was there an overall overhead and profit % allowed by the owner/client for
all contractors? (Yes/No)
7
Items Requested
Questions
If yes, please specify which ones and how they were quantified?
NEED CASE STUDIES WITH FOLLOWING INFORMATION
What tier of contractor were you on this contract? (0,1,2)
Were there any items which were not allowed to be charged to the change
order but you felt should have been included? (Yes/No)
9
8
If yes, how were the negotiated rates determined?
Please note any other specific items you feel is relevant to this change order.
Were any labor rates negotiated for the change order different than those
used in the original bid? (Yes/No)
M. Syal _2013
Prof. Matt Syal, Construction Management, MSU
Conclusion
1. These case studies show that there are many differences in the way change order are priced.
2. These cases also show that there is a lack of standardization in change orders and some type of guidelines are required.
3. More case studies need to be evaluated to identify the overhead and profit percentages and cost allowed.
4. We need to evaluate the consequential costs and how they will be included in the electrical contractors’ guidelines
M. Syal _2013
Prof. Matt Syal, Construction Management, MSU
THANK YOU.
Prof. Matt Syal
Michigan State University
syalm@msu.edu
www.msu.edu/~syalm
M. Syal _2013
Prof. Matt Syal, Construction Management, MSU
Justification • As per an ELECTRI Council member*:
o Electrical and low voltage subcontractors are lately
confronted with the low amount of overhead/markup that
they are allowed to apply on change orders. They are
being asked to settle for 5-10 % on change order
o Many feel that these low overhead/ mark up
percentages are not realistic and they cannot survive on
these numbers.
o There is no published data to show:
- Allowed percentages in various markets
- Percentages used by other subcontractors
- Breakdown substantiation of the overhead and
markup
32 *Mr. Arthur Ashley
Ferndale Elec., MI
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