When a project owner has issued directives involving a changed scope of work, or is merely considering changes, the owner quite appropriately looks to the contractor for a price proposal. On a large, complex project, or a project plagued by excessive changes, the preparation of change order proposals can be quite burdensome for the contractor.
The common wisdom is that the cost of preparing change order proposals and negotiating contract modifications is part of the contractor’s general and administrative, or home office, overhead. This cost is absorbed by the mark-up on direct costs. But what if the proposal does not result in a change order? What if the project owner reduces rather than expands the scope of work? There would then be no increased direct costs to mark up.
In federal construction contracting, this problem is addressed by allowing recovery of the expense of proposing and negotiating change orders as a direct cost of project administration. The rationale is that the project owner, the government, controls changes in the scope of work and initiates the preparation of change order proposals. The process exists for the convenience of the government and the efforts should be compensable to the contractor.
Contractor recovery of change order proposal costs is strictly limited. The efforts cannot involve the prosecution of a claim against the government. The costs, such as attorney, accountant and consultant fees, must be segregated and allocated to that one contract. As one contractor recently learned, the costs cannot be carried in the G & A pool and then duplicated as direct contract costs.
As always, I welcome your comments on this matter. Does it make sense to compensate contractors for the direct cost of a change order process which is controlled and initiated by project owners? Or, do contractors generally make out just fine with change orders and the mark-ups on direct costs?
Bruce Jervis, EditorConstruction Claims Advisor