Change Order
Change orders in construction: the definition, formula, how to price them properly, and how to get them signed before doing the work — not after.
Calculation Formula
Change Order Price = (New Labor Hours × Burdened Rate) + Material Cost + Overhead + Markup Real Contractor Example
A residential remodeler is completing a $48,000 kitchen renovation. The owner decides mid-project to upgrade from standard tile to a heated radiant floor system.
Why Contractors Lose Money on Change Orders
The most common change order mistake is not writing one. A homeowner says "while you're in the wall, can you add an outlet?" and you say yes. You spend $180 in materials and 3 hours of your electrician's time. You never write it up. At closeout, the client pays the original contract amount and the change order never gets discussed.
You just donated $400 to your client.
This happens on almost every residential remodeling job. The pattern is always the same: the scope change is small, the conversation is casual, and writing a change order feels awkward in the moment. But multiply three $400 change orders by 40 jobs per year and you have lost $48,000 in revenue — enough to hire a part-time crew member.
How to Price a Change Order Correctly
A proper change order price accounts for four components:
Labor: Calculate actual hours for the additional work multiplied by your burdened labor rate — not the wage rate. Do not estimate generously. Time the work category carefully.
Materials: Get an actual price from your supplier. Add your standard material markup (typically 15–25%). Add a waste factor appropriate to the material type.
Overhead Allocation: Every change order consumes administrative time, coordination effort, and carries overhead just like the original contract. Apply your standard overhead allocation rate (typically 10–18% of direct costs).
Markup for Profit: Apply your target gross profit markup after overhead. On change orders, many contractors use a slightly higher markup (5–10% above their standard) to account for the disruption to workflow and the scheduling inefficiency of small scopes.
The Signed-First Rule — Non-Negotiable
Never perform change order work before the client signs the change order document. This is the one rule that separates contractors who get paid for extra work from those who absorb it.
The signed-first rule is difficult to enforce because it feels confrontational. Clients push back. "You're stopping the job over a minor addition?" But the alternative — performing work without signed authorization — gives the client the leverage to dispute the charge at closeout, and they often will.
With a signed change order in hand before any work begins, you have a contract for the additional scope. Without it, you have a verbal conversation that the client may not remember the same way you do.
Frequently Asked Questions
What is the difference between a change order and a change directive?
A change order is a mutually agreed and signed document modifying the original contract scope and price. A change directive (also called a construction change directive) is a unilateral instruction from the owner to proceed with changed work before pricing is finalized — often used when the parties cannot agree on price but the work cannot wait. Change directives carry risk for the contractor because pricing disputes are resolved later.
Can I refuse to perform change order work without a signed agreement?
Yes, and in most cases you should. A contractor is not obligated to perform work outside the original contract scope without additional compensation and written authorization. The original contract defines your obligations — everything beyond that is new scope. Most standard contracts (AIA, ConsensusDocs) explicitly require written change orders for scope modifications.
What is a reasonable markup on change order work?
Most contractors apply their standard markup plus an additional 10–15% on change orders to account for schedule disruption, administrative handling, and the inefficiency of small-batch work. On a change order with $1,000 in direct costs, a contractor targeting a 28% gross margin might price it at $1,580–$1,720.
Put This Into Practice
Knowing the definition is step one. RemodelFin tracks this in real time on every job — no spreadsheets.