RHACOVA

Pricing and margin

How to Price Change Orders Without Losing Profit

Added work is not a favour. It carries its own cost, its own overhead and its own risk, and it should carry its own margin too.

The short answer

Price a change order the way you priced the original job: full cost, including the disruption it causes, plus full overhead and full margin. Added work consumes the same office, supervision and risk as contracted work. Pricing it at bare cost does not just forgo profit on that piece — it lowers the margin of the entire job.

Definitions

Change order
Approved work outside the original scope, with its own price and its own cost. In RHACOVA it never alters the frozen baseline of the estimate it came from.
Disruption cost
The cost the change causes beyond the work itself: remobilization, resequencing, waiting crew, an extra delivery, a second permit trip.
Scope creep
Added work performed without an approved change order. It has cost and no revenue, which makes it indistinguishable from rework in the final numbers.

The formulas

Change-order cost = added direct cost + disruption cost

Change-order price = change-order cost ÷ (1 − target margin)

Job revenue = contract price + approved change-order revenue

Job cost = base job cost + change-order cost

Worked example: pricing the change itself

Added work costing $2,400.00 — materials, loaded labor and the half day lost resequencing — priced at a 25% target margin:

  • Change-order cost: $2,400.00
  • Change-order price: $3,200.00
  • Profit it adds: $800.00
  • Margin: 25.00%

What pricing at cost does to the whole job

A $40,000 job costing $30,000, with the same added work handled two ways:

  • Change order billed at cost — revenue $42,400.00, cost $32,400.00, profit $10,000.00, margin 23.58%
  • Change order priced with margin — revenue $43,200.00, cost $32,400.00, profit $10,800.00, margin 25.00%

Billing added work at cost kept the profit dollars identical to the original contract while adding revenue — so the job's margin fell. The customer got free overhead and free risk. That is the dilution effect, and it is invisible unless you look at margin rather than dollars.

Approve it before you build it

The expensive change orders are the ones performed first and priced afterwards. Written approval before work starts protects the price, the schedule and the relationship. In RHACOVA an approved change order adjusts the current contract value and the projected profit, while the original baseline stays frozen — so at closeout you can still see how the estimate itself performed, separately from how much the scope grew. See committed costs and cost-to-complete.

Common mistakes

  • Charging material and labor only, with no overhead or margin.
  • Absorbing small changes to keep the peace until they add up to a lost margin.
  • Forgetting the disruption the change causes to work already sequenced.
  • Counting change-order revenue in the result and forgetting its cost — see how to calculate job profit.

Quick answers

Should a change order carry overhead and profit?
Yes. It consumes the same office, supervision and risk as the base contract, and pricing it at bare cost dilutes the margin of the whole job.
What about the disruption a change causes?
It is a real cost: remobilization, resequencing, idle crew time and repeated deliveries. If it is not priced it is absorbed out of profit.
Does a change order change the original estimate?
No. In RHACOVA the baseline stays frozen; approved change orders adjust the current contract and projection, so you can still see how the original estimate performed.

Run the numbers

Revenue including approved change orders, total cost, profit in dollars, profit margin and markup on cost.

Open the Job Profit Calculator

Free, no account, and the answer stays on the page.

Keep change orders on the record

A RHACOVA Job records approved change orders on both the revenue and the cost side and updates projected profit, while the original baseline stays untouched.

Open Jobs

How RHACOVA defines these terms

Every calculator, estimate and job in RHACOVA uses one set of financial definitions, and they are written down rather than implied. Read the RHACOVA methodology for the full list of definitions this article relies on.

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