Change Order Overhead % Guidelines ... - ELECTRI International 2-Progress Prsn-Change... · CHANGE ORDER OVERHEAD % GUIDELINES Progress Report ELECTRI International Prof. Matt Syal,

M. Syal _2010

CHANGE ORDER OVERHEAD %

GUIDELINES

Progress Report

ELECTRI International

Prof. Matt Syal, Ph.D., LEED® AP

Joseph Diffendal, Graduate Assistant

Construction Management

School of Planning, Design and Construction

Michigan State University

January 2013

1

M. Syal _2010

Objectives

• Classify various cost items as

direct costs and overhead costs

• Survey the NECA members for

overhead cost % related practices

• Develop recommendations for

overhead cost % for change

orders

2

M. Syal _2010

Task Force Members

3

Earl Restine, Jr. Fuller Electric Anthony Maloney Koontz-Wagner/NECA Indiana Michael Abbott Abbott Electric Bob O'Donnell Greater Toronto ECA Don Campbell NORCAL NECA Greg Long NAPA ECT Tim Schultheis Schultheis Giovanni Marcelli Accubid Brad Giles Giles Electric Jerry Hayes United Electric Co. David Kurtz Shaw Electric Arthur Ashley Ferndale Electric Todd McCormick McCormick Systems Christopher Foster Whitehead Electric Henry Brown Miller Electric Daniel Divane Divane Bros. Electric Co. James DiLullo Dynalectric Co. Allen Estes,III Oles Morrison Brandon Booth Howard & Howard Michael Crawford NECA Michigan Dan Tripp NECA-SMC Rick Mckinney MicKinney Associates Kyle Schemitsch ACCI

Sylvia Selwood ELECTRI Russell Alessi ELECTRI

M. Syal _2010

Direct Costs Items and Rates Identified in

Major Contractual Documents

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Classification of Costs

5

Direct Costs Overhead Costs Labor Home office overhead

Material costs Off-site supervision

Site supervision Change order preparation, negotiation and associated travel Handling, carrying and shipping costs

Restocking and/or cancellation costs Time delays

Performance and payment bond premiums Guaranty and warranty durations

Temporary protection Additional performance and payment bond premiums

Temporary heat, light and power Property taxes, business licenses, auto insurance Safety equipment staging, scaffolding and lights

Items directly related to the changes Dues and subscriptions

All applicable taxes Postage and courier (non-job related) Material escalation

Labor escalation Advertising and telephone

Clean-up and disposal Legal and accounting fees

Estimating/Engineering Sales and marketing

As-built drawing and schedules President's salary and benefits

CPM revisions and updating Sales force salaries and benefits

Cost analysis Support Staff salaries and benefits

Purchasing and Expediting Dispatcher's salary and benefits

Timekeepers Support staff salaries and benefits

Mobilize and demobilize Purchasing salaries and benefits (estimating only) Contract Administration

Audit cost contingency Estimators salaries and benefits (except for change orders) Travel, room and board expenses

Permits and licenses fees

Small tools

Equipment and tool rental

Job-related insurance, warranty and interest

Job site office and storage rental

Job site equipment, furniture and supplies

Salaries and benefits for job site management and clerical staff

M. Syal _2010

Survey of NECA Members on

Overhead Costs % Related Practices

• Survey Conducted during Mid December -

January 8

• 181 Respondents

• In addition, some shared case studies

• A quick peek into the survey data on next

3-4 slides

6

Types of Respondents

Building & Low Voltage/Control

Building

Line, Building & Low Voltage/Control

Low Voltage/Control

Line & Building

Line Contractor

Low Voltage/Control & Other

Other

Building & Low Voltage/Control (42%)

Building (38%)

Line, Building & Low Voltage/Control (7%)

Low Voltage/Control (4%)

Line & Building (3%)

Line (3%)

Building, Low Voltage/Control & Other (2%)

Low Voltage/Control & Other (0.5%)

Other (0.5%)

Location of Respondents

Northeast 21%

Southeast 9%

Midwest 31%

Southwest 5%

West 30%

Canada (Ontario) 4%

U.S. by Region

U.S Nationwide - 13 Responses Mexican Territory - 1 Response Caribbean - 1 Response

Average %:

Public Work - 14.80% Private Work - 15.44%

0

10

20

30

40

50

60

70

Under5%

6 -10%

11 -15%

16 -20%

21 -25%

26 -30%

Over30%

Nu

mb

er o

f R

esp

on

ses

Typical Overhead and Profit %

Typ. Public Work

Typ. Private Work

Typical Overhead

and Profit %

0

10

20

30

40

50

60

70

Under5%

6 -10%

11 -15%

16 -20%

21 -25%

26 -30%

Over30%

Nu

mb

er o

f R

esp

on

ses

Maximum Overhead and Profit %

Max. Public Work

Max. Private Work

Average %: Public Work - 16.71% Maximum = 35% (2 Responses) 30 - 34% (3 Response)

Maximum Overhead

and Profit %

Private Work - 18.04%

Maximum = 50% (1 Response)

30 - 49% (6 Response)

0

10

20

30

40

50

60

Under5%

6 -10%

11 -15%

16 -20%

21 -25%

26 -30%

Over30%

Nu

mb

er o

f R

esp

on

ses

Minimum Overhead and Profit %

Min. Public Work

Min. Private Work

Average %: Public Work - 9.45% Minimum = 0% (6 Responses)

1 – 5% (31 Response)

Minimum Overhead

and Profit %

Private Work – 9.25%

Maximum = 0% (6 Responses)

1-5% (39 Response)

M. Syal _2010

Plans for the Next Phase

• Would welcome more case study

examples

• Analyze the survey data and case studies

• Compile similar data published by other

industry sources

• Develop guidelines for:

– items to be included in direct costs and

overhead costs

– overhead cost % for change orders

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M. Syal _2010

NEED CASE STUDIES?

• Items Needed

– Contract governing the change order

– Initial change order with line item costs

– Final approved change order with line item

costs

Note: If possible, provide best, typical and

worst case scenarios

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M. Syal _2010

THANK YOU

Matt Syal

Joe Diffendal


[email protected]

M. Syal _2010

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M. Syal _2013

Prof. Matt Syal, Construction Management, MSU

Overhead and Profit Percentages

• Most standard agreements leave the overhead and profit % undefined and up to negotiations

• 18 agreements were found with overhead and profit defined

General Contractors % 7 to 20%

Subcontractor % 7 to 15%

Pass-through % 3 to 7.5%

Many contracts limit the percentage for overall overhead and profit

15 to 25%

Different % for different types of costs Direct Labor 10% (16-18%)

Material Costs %5 (6-7%)

M. Syal _2013


Costs of Change Orders

Consequential Costs Labor Related

• Stacking of trades, interferences and disruptions

• Fatigue, mistakes, errors and stress

Delays and Acceleration • Capacity, opportunity costs, retainage release

and cash flow

Field Conditions • Weather, congested areas and working in finished

areas

Overhead Costs

• Home office

• Officers salaries and benefits

• Staff Salaries

• Change order preparation

Direct Costs

• Labor costs

• Material and equipment

• Taxes and fees

• Facilities and utilities

M. Syal _2013


Costs of a Project vs. Change

Order • Consequential costs are consider during the

bidding process

• In a change order process consequential

cost are typically difficult to justify. Many

agreements don’t allow for these types of

costs.

Change Order

Pricing

Direct Costs

Overhead & Profit %

Consequential Costs

Original Project

Pricing

Bid

• Direct Costs

• Overhead & Profit

• Consequential Costs

M. Syal _2013


Specific Electrical Contractor

Issues Electrical Contractors feel that they are treated unfairly on change orders because:

1. They are typically a first or second tier contractor Overall Overhead Profit Allowed = 15%

• Tier 0: General Contractor 5%

• Tier 1: Building Electrical Contractor 5%

• Tier 2 :Low Voltage or Controls Contractor

5%

2. Electrical contractors’ material costs are typically much less than other contractors

• Higher percentage of the change order is labor (requires more overhead)

• Typically standard materials are used and no fabricated materials are required

M. Syal _2013


Change Order Project

So what are the major factors in change order

pricing?

1. Overhead and profit percentages

2. Direct costs, which costs are included/excluded

3. Overhead costs, which costs can be included

4. Consequential costs, how to calculate or justify

5. How to present to costs in a manner which the client

will accept

M. Syal _2013


Project Methodology

• NECA members recently responded to a survey

Link: www.surveymonkey.com/s/HNLL6R8

• Evaluate survey data

• Case studies will be evaluated

• Interviews with GC and owners

• Interviews with other types contractors

Final product

• Provide summary of findings and guidelines for the electrical contractors on change orders

M. Syal _2013


Comparative Table of Case

Studies Case Study Case 1 Case 2 Case 3 Case 4 Case 5

Provided By Kyle S. Jerry H. Jerry. H Bob O. Rick M.

Company ACCI United Electric United Electric McKinney

Assoc.

Share O&P %

Percentage Yes

Contractor % 15 10 15 10 15

Subcontractor

% 10 10

Pass-Through

% 5 5

Tier 2

Costs Identified Yes Yes Yes Yes No

Costs Included Yes Yes Yes No No

Costs

Excluded Yes No No Yes No

Comments Excluded

Costs

Labor Rates Include

Overhead Excluded

Costs Labor Rates

M. Syal _2013


Specific Change Order Case Study

I • Contractor % = 15%

• Subcontractor % = 10%

• Pass-through % = 5%

• Tier = not defined

• Direct Costs

• Labor

• Materials

• Rental

• Premiums for all bonds and insurance

Quotes

“Consequential costs are hard to determine.”

“If you handled your consequential costs well you

make the most profit!”

Kyle Schemitsch

ACCI

(813)978-0101 ext. 33

• Overhead Costs

• Supervision wages

• Timekeepers

• Watchman

• Clerks

• Hand tools

• Incidentals

• General office expense

• All other expenses not include in “cost”

• Items Excluded

• Their were $8,000 of misc. material and

consumables

• 60 quotes for the change order

M. Syal _2013



II • Contractor % = 10%

• Labor Rate was negotiated with overhead included (% unknown)

• Subcontractor % = not defined

• Pass-through % = not defined


• Direct Costs Included

• Clean up

• Material Handling

• Project Manager

• Safety

• Transportation

• As Built Drawings

• Job Truck

• Drawings

• Materials

Jerry Hayes (President)

United Electric Company, 1270 Kennestone

Circle, Marietta GA, 30066

(770)499-9292

• Items included in pricing but excluded from

overhead and profit markup

• Bonding

M. Syal _2013



III • Contractor % for Overhead = 10%

• Contractor % for Profit = 5%


• Pass-through % = not defined


• Direct Costs Included

• Materials and Taxes

• Electrician

• Supervisor

• As Built Drawings

• Testing

• Delivery & Pick Up

• Job Truck

• Warehouse Truck

• Permit

• Clean Up

Jerry Hayes (President)

United Electric Company, 1270 Kennestone

Circle, Marietta GA, 30066

(770)499-9292

M. Syal _2013



IV • Contractor % = 10%

• Subcontractor % = 10%

• Pass-through % = 5%


• Costs excluded from change orders

• Project Staff

• Field Engineering

• Staff Travel, Meal and Accommodations

• Temporary Offices/Furniture/Equipment

• Telephone, Internet, Fax & Radios

• Insurance, Bonds, Permits and Licenses

• Temporary Fence & Hoarding

• Plant Depreciation

• Safety

• Daily & Final Clean up

• Partnering

Bob O’Donnell

• Costs excluded from change orders continued

• Winter Conditions

• Temporary Enclosures/Partitions/Stairs

• Temporary Lights, Service and Power

• Temporary Water Service

• Temporary Access

• Sanitation

• Temporary Fire Protection

• Project Sign

• Progress Photos

• Professional Services

• Printing and Reproductions

• Architect’s/Owner Trailer

• Flagmen/Off Duty Police

• Quality Control And Safety staff

M. Syal _2013


Specific Change Order Case Study V

• Contractors % = 15% for overall overhead and profit


• Pass-through % = not defined but shared

• Tier = second contractor

• The issue with this change order was that the labor

rate

• Contractor contract costs = $89,974.00

• Contractors cost of work = $79,500.00 (12% for overhead and profit)

• Owner paid $66,682.53 (74% of the prevailing labor rate)

Rick McKinney

Lloyd F. McKinney Associates, Inc.

25350 Cypress Avenue, Hayward, CA 94544

(510)783-8043

M. Syal _2013


CASE STUDIES?

1 Please Provide

2 Please Provide

Answers

3

4

5

6

%

7.A % for Tier 0: General Contractor %

7.B % for Tier 1: Subcontractor %

7.C % for Tier 2: Sub-subcontractor %

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Note: provide best, average and worst case scenarios.

10

Contract agreement governing the change order

Was the overhead and profit % negotiated or defined in the agreement?

(Negotiated/Agreement)

If yes to question 5, what was the overall overhead and profit % for all

contractors?

If yes, please specify the items which were not allowed.

If yes to question 5, how was the overhead and profit % divided?

Were consequential costs considered? (Yes/No)

Change order breakdown with line item costs

Was there an overall overhead and profit % allowed by the owner/client for

all contractors? (Yes/No)

7

Items Requested

Questions

If yes, please specify which ones and how they were quantified?

NEED CASE STUDIES WITH FOLLOWING INFORMATION

What tier of contractor were you on this contract? (0,1,2)

Were there any items which were not allowed to be charged to the change

order but you felt should have been included? (Yes/No)

9

8

If yes, how were the negotiated rates determined?

Please note any other specific items you feel is relevant to this change order.

Were any labor rates negotiated for the change order different than those

used in the original bid? (Yes/No)

M. Syal _2013


Conclusion

1. These case studies show that there are many differences in the way change order are priced.

2. These cases also show that there is a lack of standardization in change orders and some type of guidelines are required.

3. More case studies need to be evaluated to identify the overhead and profit percentages and cost allowed.

4. We need to evaluate the consequential costs and how they will be included in the electrical contractors’ guidelines

M. Syal _2013


THANK YOU.

Prof. Matt Syal


[email protected]

www.msu.edu/~syalm

M. Syal _2013


Justification • As per an ELECTRI Council member*:

o Electrical and low voltage subcontractors are lately

confronted with the low amount of overhead/markup that

they are allowed to apply on change orders. They are

being asked to settle for 5-10 % on change order

o Many feel that these low overhead/ mark up

percentages are not realistic and they cannot survive on

these numbers.

o There is no published data to show:

- Allowed percentages in various markets

- Percentages used by other subcontractors

- Breakdown substantiation of the overhead and

markup

32 *Mr. Arthur Ashley

Ferndale Elec., MI