The True Cost of Change Orders: Beyond the Line Item Price
- Cost Construction Accounting
- 3 days ago
- 8 min read
Most contractors believe "change orders are where we make our money." The logic seems sound you're already mobilized on site with crews ready to work, and you get to mark up the additional scope. What could go wrong?
Everything, it turns out. The line item price you charge for a change order rarely captures the true cost of executing that change. Hidden beneath are disruption costs, coordination overhead, schedule impacts, productivity losses, and a dozen other expenses that quietly devour your markup and then eat into your base contract profit.
Let's examine what change orders really cost and why your job costing system probably isn't telling you the truth.
Why Change Orders Look Profitable But Aren't
The markup illusion is powerful. A client pays $50,000 for a change order. Your estimate shows $40,000 in direct costs. Apply 25% markup and you're making $10,000. Simple math.
Except your accounting system only captures the lumber and carpenter hours. At month-end, your report shows $42,000 in costs and $8,000 profit.
Here's what the report misses: Your PM spent twelve hours coordinating reviewing plans, pricing, managing execution that's $1,800 charged to overhead. Crew disruptions cost three hours of productivity daily across six workers, totaling 36 hours showing as base contract overruns. 4 hours of demolition and rework got charged to "corrections." 5 extra days of schedule extension added $3,500 in site costs to project overhead.
That $10,000 profit just became a $2,500 loss. Multiply by fifteen change orders, and you see why jobs underperform.
The fundamental problem: job costing systems track what's easy materials and direct hours but miss what's hard: disruption, coordination, lost productivity, and ripple effects. These soft costs are real, substantial, and systematically invisible.
5 Hidden Costs That Destroy Change Order Profitability
1. Crew Disruption and Lost Productivity
When you pull a crew off current work to execute a change order, you're not just paying for hours spent on the change. You're paying for:
Lost momentum and rhythm: A crew in flow is productive. Stop them mid-task for a change, and regaining that rhythm takes time.
Transition time: Workers must understand the change, gather different materials and tools, and reset their workspace. The clock is ticking but nothing productive is happening.
Reduced productivity on both activities: Research shows productivity drops 20-40% during and after change order execution. Workers are less efficient on unplanned work and when returning to interrupted tasks.
Real example: A change order requires four hours of productive work. The true cost:
1 hour to review, stage materials, and set up
5 hours of actual work (lower productivity than planned work)
2 hours disruption to original work
2 hours reduced productivity when crew returns to original scope
That four-hour change order costs ten hours. You charged $200 for labor. You actually incurred $500. Your 25% markup became a 60% loss.
2. Schedule Impact and Acceleration Costs
Every change order has schedule implications:
Consumed schedule float: Even without extending completion dates, changes eat the buffer you needed for normal construction uncertainties. When other issues arise, you have no float left.
Overtime to maintain a schedule: The client approved the change but not a time extension. You absorb overtime premium (1.5x to 2x) to prevent delays. This rarely gets captured in change order pricing.
Extended general conditions: If changes extend the project schedule, you incur additional weeks of superintendent salary, site facilities, insurance, and other time-related costs often $8,000-15,000 per week on mid-sized projects. These typically get buried in project overhead rather than charged to the changes that caused them.
Example: A $35,000 change order extends your schedule two weeks. You mark up direct costs 20% and expect $7,000 profit. But two weeks of extended general conditions costs $18,000. You just lost $11,000, but your job costing doesn't connect these dots.
3. Coordination and Management Time
Change orders don't execute themselves. Your project manager coordinates them, but this time rarely gets tracked to specific changes.
The coordination process includes:
Initial client meetings (1-3 hours)
Reviewing plans and analyzing implications
Preparing RFIs if design clarification is needed
Getting subcontractor pricing
Preparing change order proposals
Negotiation meetings with clients
Post-approval coordination with trades
For a moderately complex change order: 8-15 hours of PM time. At $85-120 per hour fully loaded, that's $1,000-1,800 per change order. On projects with fifteen changes, that's $15,000-27,000 in coordination costs showing up as general overhead.
This represents people who could otherwise manage productive work, solve field problems, or prevent issues. There's a real opportunity cost to having your PM spend 20% of their time managing changes.
4. Rework and Material Waste
Changes frequently require removing or modifying completed work:
Demolition labor takes longer than original installation. Removing drywall without damaging studs takes longer than hanging drywall. This time is rarely estimated or billed.
Disposal costs for removed materials add up but often aren't included, especially if you already have a dumpster on site.
Material waste and rush orders: Small quantity orders cost more per unit. Rush deliveries add fees. Change order materials arriving piecemeal mean multiple delivery charges. Equipment may need remobilization.
Lost material value: Demolishing work you just completed last week means losing that material cost a sunk cost that should be recovered but rarely is.
I've seen change orders where 30-40% of total cost is demolition and rework, but contractors only bill for new installation.
5. Ripple Effects on Other Trades
When you execute a change order, impacts ripple out to other work:
Other trades get delayed: Your HVAC sub arrives to install ductwork, but change order work means framing isn't complete. They stand down and return next week, charging remobilization and disruption fees.
Sequence gets restacked: Careful sequencing for maximum efficiency disappears. Trades now work out of optimal sequence, causing productivity losses across the board.
Volume efficiencies are destroyed: Your drywall sub priced the job assuming continuous work. Now they're doing base work, stopping for changes, resuming base work. They've lost efficiency but you're paying the same rate.
Example: An electrical change order adds three circuits. Simple, right? But it happens after drywall is up, requiring patching and repainting. New circuits need conduit that conflicts with HVAC ducts, forcing rerouting. Three trades that were done are back on site, unplanned, dealing with coordination challenges. The productivity loss across all trades can exceed the electrical work's direct cost.
Real Numbers: A Case Study
Here's an actual commercial office renovation where the contractor couldn't understand why the project lost money:
Project Overview:
Original Contract: $800,000
Change Orders: $120,000 (15% of contract)
Average CO Markup: 20%
Expected Outcome:
Base Contract Profit: $80,000 (10%)
Change Order Profit: $24,000 (20% on $120K)
Total Expected: $104,000 (11.3% margin)
Actual Outcome:
Total Revenue: $920,000
Total Costs: $892,000
Actual Profit: $28,000 (3% margin)
Shortfall: $76,000
What Happened:
Change orders showed $13,000 profit on paper (materials and direct labor tracked properly). But hidden costs:
Lost productivity on base work: $18,000
Schedule extension (2 weeks): $16,000
Project management coordination: $8,000
Overtime to recover schedule: $9,000
Rework and demolition: $4,000
Material waste and rush orders: $3,000
Total Hidden Costs: $58,000
True Change Order Result:
Billed: $128,000
Direct Costs: $115,000
Hidden Costs: $58,000
Total True Cost: $173,000
Actual Result: -$45,000 loss
The change orders didn't just fail to make money, they lost $45,000. But because costs were scattered across job cost codes, the PM thought changes were profitable and the base contract underperformed.
Reality: The base contract would have been fine. Change orders destroyed profitability.
How to Track True Change Order Costs
To protect margins, you need to track costs traditional systems miss:
Create Dedicated Cost Code Structures
Set up comprehensive change order tracking:
Each change order needs subcodes:
CO-[Number]-Materials
CO-[Number]-Labor
CO-[Number]-Coordination (PM/Super time)
CO-[Number]-Disruption (productivity loss)
CO-[Number]-Rework
CO-[Number]-Schedule Impact
Create a "Change Order General" code for impacts affecting multiple changes. Make change order costs visible instead of hiding them in base contract codes.
Implement Real-Time Field Tracking
Your foremen need to capture impacts daily:
Daily reports should include:
Change order work performed
Time required
Interruptions to other work
Estimated productivity loss
Coordination challenges
Time tracking needs cause codes so workers can indicate:
Working on change order
Disrupted by change order
Waiting due to change coordination
Reworking due to change
Photo documentation of disruption creates visual evidence while memories are fresh.
Measure Productivity Impacts
Establish baseline productivity for common activities. Example: framing crew typically frames 800 square feet per day.
Measure during and after changes. Same crew only frames 550 square feet when working around changes.
The difference of 31% productivity loss is a real cost. If that lasts three days at $800 per crew day, that's $240 daily in lost productivity, or $720 total attributable to the change order.
Monthly Change Order Reviews
Don't wait for project closeout:
Review each CO as completed
Calculate true all-in costs
Compare to what was billed
Adjust pricing strategy for pending COs
Tools That Help:
Construction-specific accounting (Sage 100 Contractor, Foundation)
Integrated time tracking with cause codes
Daily reporting apps
Proper WIP reporting segmenting CO costs
Protecting Your Margins on Future Change Orders
Pricing Strategy Adjustments
Build in disruption factors: Add 15-25% productivity factor for mid-project changes. Higher for occupied spaces or work affecting multiple trades.
Price management time explicitly: Include line items for coordination. Don't hide PM costs in labor rates.
Address schedule impacts: Price extended general conditions if the change adds time. Include acceleration costs if schedule must be maintained.
Anticipate ripple effects: Walk through how changes affect other trades. Price coordination time. Include contingency for unknown interactions.
Contract Language That Protects You
Equitable adjustment clauses: Reserve rights to adjust pricing for owner-caused delays and productivity impacts.
Time extension rights: Automatic extensions for change orders. Protection against liquidated damages when changes occur.
Change order limitations: Specify maximum number/value before contract adjustment. Right to renegotiate if changes exceed thresholds.
When to Push Back
Sometimes the right answer is "no" or "not now." Warning signs:
Change requires rework of recently completed items
Affects work already in progress
Requires coordination with 3+ trades
Owner wants compressed timeline
Design isn't fully detailed
Comes late when schedule is tight
Push back professionally:
Explain true cost implications
Offer alternative timing
Provide price comparison: now vs. later
Document risks in proposal
Sometimes losing a change order is better than losing money on one.
Conclusion
Change orders aren't automatic profit centers. Hidden costs often exceed markup, and most contractors lose money on changes without realizing it.
The line item price you charge materials plus labor plus markup captures only a fraction of the true cost. Disruption, coordination, productivity loss, schedule impact, and ripple effects systematically destroy margins while remaining invisible to traditional job costing.
The solution requires two things: rigorous tracking and honest pricing. Track the soft costs that systems miss. Measure productivity impacts. Capture PM coordination time. Document disruption and ripple effects. Then price changes based on true costs, not wishful thinking.
Knowing your true costs isn't just good practice, it's a competitive advantage. While competitors lose money on "profitable" change orders, you'll price accurately, protect margins, and build sustainable profitability.
Need Help Tracking Your True Job Costs?
If you're tired of profitable projects that don't make money, it's time to get serious about job costing accuracy. At Construction Cost Accounting, we specialize in implementing systems that capture the hidden costs traditional accounting misses including proper change order tracking.
We help construction companies:
Set up comprehensive job costing structures that track true project costs
Implement real-time WIP reporting that shows problems before they become disasters
Integrate time tracking, payroll, and job costing for accurate labor allocation
Create custom reports that reveal where money is really going
Train your team to use Sage 100 Contractor, QuickBooks, or Foundation effectively
Our clients typically discover they've been losing 2-5% in margins on costs they weren't tracking. Once we implement proper systems, they recover those margins often within the first 90 days.
Ready to stop guessing and start knowing your true costs?
Schedule 30 minutes free consultation to review your current job costing setup. Let us handle the bookkeeping and cost tracking complexity so you can focus on building profitably.
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