Are Change Orders Really Money Makers?

Contractors in the construction might claim to dislike change orders, but it gives a big boost to their bottom line.
February 15, 2012

The best door-to-door salesmen want to get in your house because they know if they can get beyond the stoop or the porch, they have a better chance to make the sale. And not only are they more likely to make the sale, but they’re more likely to make bigger sales.

The same holds true for contractors.

Many contractors publicly say they don’t like change orders because they cause them to stop, recalculate and buy more materials, prolonging the job. But change orders almost always mean more money for them.

“There will always be change orders in a project,” said Steve Gray, president and CEO of Steve Gray Renovations, in Indianapolis, Ind. “And you know what? They actually help my bottom line.

“We welcome change orders because they have a higher profit margin, because of the extra time and materials,” Gray said. “Our customers understand that because we add value by focusing on quality over price.”

Contractors typically add 20 percent to a contract after the figure the cost of materials and labor–10 percent for overhead and 10 percent for profit.

When change orders enter the equation, contractors may charge an additional 30 percent or even 40 percent for the change, said Eric Reynolds, owner and president of EW Reynolds Contracting, in Williamsburg, Va.

“That’s where a lot of the money is made,” said Reynolds, whose company does remodeling and mold remediation work. “Sometimes you get into the job at cost–just to keep your guys busy so you can pay them. When the customer wants to change the contract, that’s where you make your real money, the profit.”

Why do contractors charge that much more for change orders? Well, because they can.

At that point, the customer has signed a contract, committing himself to the contractor, and he probably has developed at least some level of trust and comfort with the contractor. The homeowner wants the contractor to stay on the job and will pay for changes if the charges are not too unreasonable. And, of course, only the savviest homeowners know what contractors pay for materials and what they pay their workers, so contractors are free to charge that extra 30 percent or so.

Of course, the downside of change orders is that disputes sometimes arise as a result. Customers sometimes will insist that extras be covered by the original bid price, or they may balk at paying more if an architect’s error made additional work necessary.

It’s common for a design flaw to cause a change order, but most change orders occur because customers change their minds. In those cases, homeowners and other customers–and most contractors–want to avoid a dispute that can lead to hard feelings. They want their contractor to be happy because they don’t want anything to hurt the quality of the work, so they will pay for change orders.

Experienced contractors know that contracts need to spell out all the details related to change orders and that those details must be made clear to customers to avoid potential disputes.

Mark Di Vincenzo is a journalist with 24 years of experience and a New York Times best-selling author. Mark blogs via Contently.com.

Photo credit: Thinkstock