Pricing and Managing Profitable Change Orders in Electrical Contracting
As a commercial electrical contractor, you know that projects rarely go exactly according to the initial plan. Unexpected site conditions, client requests, or scope adjustments are common, leading to the need for change orders. However, poorly managed or priced change orders can quickly erode profitability and strain client relationships.
Understanding how to effectively identify, price, and communicate these adjustments is crucial for maintaining a healthy bottom line. This article will walk you through the essential steps for pricing change orders electrical contracting projects to ensure they are not only necessary but also profitable.
What is a Change Order in Commercial Electrical Work?
In the context of commercial electrical contracting, a change order is a formal agreement that alters the scope of work, schedule, or contract value from the original agreement between you and the client (or general contractor).
Common reasons for change orders include:
- Unforeseen site conditions (e.g., discovering asbestos, unexpected structural elements blocking conduit paths).
- Client-requested additions or modifications (e.g., adding more circuits, changing specified fixtures).
- Design changes or errors discovered during construction.
- Code compliance issues that require scope adjustment.
- Delays caused by other trades or external factors impacting your schedule.
Why a Clear Change Order Process is Non-Negotiable
Without a defined process for pricing change orders electrical contracting, you risk scope creep, disputes, and losing money. A clear process ensures:
- Profitability: You cover all costs and maintain your desired profit margin on the additional work.
- Legal Protection: Written documentation protects you from claims of unauthorized work or price disputes.
- Client Satisfaction: Transparent communication manages client expectations and builds trust.
- Project Control: You maintain control over scope, schedule, and budget.
Simply doing the extra work and hoping to sort it out later is a recipe for disaster. You must have a system.
Identifying and Documenting a Potential Change Order
The first step is recognizing when a change is actually a change order and not just part of the original scope. This requires a thorough understanding of your initial contract and scope of work.
- Spot the Deviation: Identify anything that falls outside the defined tasks, materials, timeline, or site conditions in your original proposal.
- Stop Work (If Necessary): If the change prevents continuation of work covered by the original scope or poses a safety risk, pause affected activities.
- Document Immediately: Take photos, videos, and detailed notes. Record the date, time, location, conditions, and exactly what constitutes the change. Get input from your lead electrician on site.
- Notify the Client/GC: Inform the relevant party verbally as soon as possible that a potential change order situation exists. Follow up immediately with written notification (email is often sufficient initially, but formal documentation follows).
Accurately Pricing the Change Order Work
This is where many contractors falter. Pricing change orders electrical contracting requires the same rigor as pricing the original job, but often under tighter deadlines. Don’t guess. Build your price from the ground up:
- Direct Costs: Calculate the actual costs for the additional work:
- Labor: Hours for electricians, apprentices, foremen needed specifically for the change. Include burdened labor costs (wages, payroll taxes, insurance, benefits). Don’t forget potential overtime if the change impacts the schedule.
- Materials: Specific quantities and costs of wire, conduit, boxes, fixtures, connectors, etc., required for the change. Account for delivery fees or rush charges if applicable.
- Equipment: Rental costs or depreciation for any specialized tools or lifts needed solely for the change order work.
- Subcontractors: Costs for any other trades you need to bring in (e.g., coring, patching).
- Permits/Inspections: Fees for any revised or new permits and inspections required.
- Indirect Costs (Overhead): Allocate a portion of your overhead that this change order will consume (e.g., additional project management time, office support, insurance, truck costs). This is typically a percentage of your direct costs.
- Markup/Profit: Add your desired profit margin on top of the total direct and indirect costs. Your markup percentage on change orders might be slightly higher than on original bids, especially if the work is urgent or disruptive, reflecting the administrative burden and potential impact on your schedule. Aim for a margin that makes the extra work worthwhile, often 15-25% or more depending on complexity and urgency.
- Contingency: For changes involving significant unknowns (like exploring unforeseen conditions further), include a small contingency percentage (e.g., 5-10%) to cover unexpected issues within the change order scope. Be transparent if you include this.
Example: Adding five new dedicated circuits and outlets in an existing finished office space.
- Labor (16 hours @ \$75/hr burdened): \$1,200
- Materials (Wire, conduit, boxes, outlets, breakers, plates): \$350
- Overhead (15% of Direct Costs): \$232.50
- Subtotal: \$1,782.50
- Profit Markup (20%): \$356.50
- Proposed Change Order Price: \$2,139.00
Tools like estimating software or even detailed spreadsheets are essential here. While PricingLink (https://pricinglink.com) is primarily for creating interactive proposals for initial project scopes and packages, the principle of clearly itemizing costs and presenting a final price is the same. For full project management including change order tracking and cost-to-complete analysis, you might look at industry-specific software like AccuBuild (https://www.accubuild.com) or Buildertrend (https://buildertrend.com).
Structuring Your Change Order Pricing
Present the pricing clearly. Break down the costs by labor, materials, and other direct costs, then show overhead and profit. Avoid lump-sum pricing unless it’s a very small, straightforward change.
Consider offering options if applicable. For instance, ‘Option A: Reroute using Surface Mount Conduit’ vs. ‘Option B: Reroute by Opening/Patching Wall’ each with a different price. This is similar to how tools like PricingLink (https://pricinglink.com) allow clients to select between different service tiers or add-ons on initial proposals, providing clarity and perceived choice, although PricingLink itself isn’t designed for mid-project change order management, it highlights the value of clear, presented options.
Communicating and Getting Approval
Clear communication is paramount. Present the change order formally, in writing, including:
- Description of Change: Exactly what work is being added, deleted, or modified.
- Reason for Change: Why is this change necessary (e.g., unforeseen condition, client request).
- Impact on Schedule: How does this change affect the project timeline?
- Impact on Price: The detailed breakdown of the additional cost.
- Approval Signature: A clear section for the client or GC to sign and date, indicating their approval of the scope, schedule impact, and price.
Do not proceed with the change order work until you have written approval. This is your legal protection and financial security. Discuss the change order in person or via video call to answer questions and get buy-in, then follow up with the formal written document for signature. For comprehensive proposal software that handles e-signatures for documents like change orders, you might look at tools like PandaDoc (https://www.pandadoc.com) or Proposify (https://www.proposify.com). These are distinct from tools like PricingLink, which focuses specifically on the interactive presentation of pricing options rather than full document workflows.
Executing and Invoicing the Change Order
Once approved, treat the change order work with the same professionalism as the original scope. Track labor and materials used specifically for the change order carefully. This data is vital for future pricing and verifies your costs.
Invoice the change order according to the terms agreed upon – this might be immediately upon approval, upon completion of the change order work, or incorporated into your regular progress draws. Ensure the invoice clearly references the approved change order document.
Conclusion
Effectively pricing change orders electrical contracting is fundamental to protecting your profits and maintaining control over your projects. It requires a disciplined process, not guesswork.
Key Takeaways:
- Always work from a clear original scope and contract.
- Document potential changes meticulously as they occur.
- Calculate costs (labor, materials, overhead, etc.) accurately and add a fair profit margin.
- Formalize all change orders in writing, detailing scope, schedule, and price impacts.
- Never start change order work without a signed client approval.
By implementing a robust change order process, you ensure that project deviations become opportunities to serve your client better while fairly compensating your business for the additional work and risk. Don’t leave money on the table or expose yourself to disputes; professional change order management is a hallmark of a successful electrical contracting business.