By Paul Levin
Pricing of claims and change orders falls into two categories: forward pricing, where the price and time is negotiated before the work is done; and post pricing -- pricing and schedule adjustments made during or after performance of the work. In applying either type, the pricing elements of the claim itself are the same and include the direct cost of performing the changed work, impact and/or delayed performance costs, indirect costs, and markups for overhead and profit. Many different methodologies have been used to successfully price claims. What is important is that the pricing elements are carefully calculated and substantiated.
Forward pricing offers the benefit of avoiding a dispute because the parties know what the costs are going to be. This gives the contractor incentive to complete the changes as quickly and inexpensively as possible to minimize delays and impact to the project. The owner, while not happy with the idea of extra costs and delay, at least knows the situation and can plan accordingly. However, many claims may not be recognized or fully understood enough for forward pricing, or the basis of the claim is in dispute. In this case, the contractor has no choice but to hold off pricing the claim until such time as it has sufficient data to provide the owner a detailed request for equitable adjustment. Additionally, identifying and understanding impact costs can be a challenge, even to the contractor doing the work.
Either way, the key to success on pricing a claim or change order is to provide as much detail as possible along with supporting documentation. Supporting documentation should include time sheets, receipts for materials, supplier invoices, documentation of equipment usage, and a record of job indirect costs. If subcontractors performed any of the changed work, their invoices also should include supporting documentation. To support impact costs, other documents kept in the course of day-to-day activities -- such as daily reports, meeting minutes, job diaries, correspondence, schedules, and photographs -- can provide needed details.
To learn more about pricing claims and change orders, plan to attend the upcoming webinar presented by the cost experts at Sage Consulting. Included in the webinar materials is a 40-page report detailing how to price changes, including references to court decisions over the years on which costs are typically allowable. To sign up for the event, click here.