Contractor’s Overhead and Profit on Deductive and Net Increase Change Orders

{"version":"0.3.0","atoms":[],"cards":[],"markups":[["b"],["a",["href","https:\/\/www.aiacontracts.org\/find"]],["i"],["strong"]],"sections":[[1,"p",[[0,[],0,"August 17, 2022"]]],[1,"p",[[0,[],0,"This article will briefly\ndescribe the treatment of the contractor\u2019s overhead and profit on both deductive\nchange orders and net increase cumulative change orders. Specifically, this\narticle will review Section 7.3.8 of the AIA 201\u2122-2017 General Conditions which\nstates, in relevant part: "]]],[1,"p",[[0,[],0,"The amount of credit\nto be allowed by the Contractor to the Owner for a deletion or change that\nresults in a net decrease in the Contract Sum shall be actual net cost as\nconfirmed by the Architect. When both additions and credits covering related\nWork or substitutions are involved in a change, the allowance for overhead and\nprofit shall be figured on the basis of net increase, if any, with respect to\nthat change."]]],[1,"p",[[0,[0],1,"Scenario 1 - The Deductive\nChange Order"]]],[1,"p",[[0,[],0,"You received a change order\nrequest to change the paint scope of work by reducing the paint color from\nthree different colors to one single color. As a result of this reduction in paint\ncolor, there is a net decrease in the Contract Sum."]]],[1,"p",[[0,[0],1,"Retaining\nOverhead and Profit for a Net Decrease"]]],[1,"p",[[0,[],0,"After reading\nSection 7.3.8, you know that the deduction from the Contract Sum will be\ncalculated by using the actual net cost of the work removed from the scope, and\nyou will keep your original overhead and profit associated with the descoped\nwork. So, why is that?"]]],[1,"p",[[0,[],0,"Your overhead\nrepresents the cost of doing business and is not necessarily chargeable to one\nspecific project. If the Owner reduces the scope of work, there is a good chance\nthat you already spent your overhead costs during the time you reviewed,\nselected, and retained the subcontractor, or estimated and coordinated the work\nfor the project. If the Owner chooses to reduce your scope of work, then it\nwould be unfair to deprive you of the overhead and associated profit for the\noverhead costs you have already incurred. "]]],[1,"p",[[0,[0],1,"Scenario 2 - The Cumulative\nChange Order \u2013 Net Increase"]]],[1,"p",[[0,[],0,"You received a change order\nrequest to change the paint scope of work by reducing the paint color from\nthree different colors to one single color; however, this time, you are\ninstructed to add an additional sheen of that color to specific areas of the\nbuilding. As a result of this cumulative change in the paint scope of work,\nthere is a net increase in the Contract Sum."]]],[1,"p",[[0,[0],1,"Adding Overhead\nand Profit for a Net Increase"]]],[1,"p",[[0,[],0,"After reading\nSection 7.3.8, you know that you can include an amount of overhead and profit in\nyour change order, so long as it is based on the amount of the net increase in\nthe Contract Sum. So, why is that?"]]],[1,"p",[[0,[],0,"The Contract Sum you\nagreed upon in your contract for construction included the overhead and profit that\nwould compensate you for your efforts to estimate, schedule, and perform the\nwork as proposed. To the extent that you are requested to perform new work that\nexceeds the Contract Sum, it would be fair for you to include the additional\noverhead and profit associated with the net increase in the Contact Sum."]]],[1,"p",[[0,[],0,"Did you know the AIA offers\nchange order management documents? At "],[0,[1],1,"https:\/\/www.aiacontracts.org\/find"],[0,[],0,",\nyou can find not only the AIA Document G701-2017, Change Order, but also other variations\nthat can be used with subcontractors, design-builders, and projects with\nconstruction managers."]]],[1,"p",[[0,[2,3],2,"AIA Contract Documents has\nprovided this article for general informational purposes only. The information\nprovided is not legal opinion or legal advice and does not create an\nattorney-client relationship of any kind. This article is also not intended to\nprovide guidance as to how project parties should interpret their specific\ncontracts or resolve contract disputes, as those decisions will need to be made\nin consultation with legal counsel, insurance counsel, and other professionals,\nand based upon a multitude of factors. "]]]]}