The owner requests changes which will cost the contractor $15,000 in labor and materials and $2,250 in overhead costs, and the contractor would be relieved of $18,000 in labor and materials costs and $2,400 in overhead. The original bid included 20% profit on all costs. The contractor wants 20% profit on all costs for the changes. The adjusted contract price for the change order should be:

The owner requests changes which will cost the contractor $15,000 in labor and materials and $2,250 in overhead costs, and the contractor would be relieved of $18,000 in labor and materials costs and $2,400 in overhead. The original bid included 20% profit on all costs. The contractor wants 20% profit on all costs for the changes. The adjusted contract price for the change order should be:

• A. A decrease of $3,780
• B. An increase of $3,780
• C. No change in price
• D. A decrease of $2,000

Answer: (A)

When pricing a change order, we look at the net change in costs the change causes, then apply the contractor’s profit on those costs to that net change.

The change adds 15,000 in labor and materials plus 2,250 in overhead, totaling 17,250. It relieves 18,000 in labor and materials plus 2,400 in overhead, totaling 20,400. The net change in cost to the contractor is 17,250 − 20,400 = −3,150, a savings of 3,150.

With the contract aiming for 20% profit on all costs for changes, the profit on this net change is 0.20 × (−3,150) = −630. The adjusted price change is the net change plus the profit, which is −3,150 + (−630) = −3,780.

So the change order should reduce the contract price by 3,780. If the net change had been positive, you would see a price increase equal to 1.2 times the net increase in costs.