Day 8: Change Order Pricing, Value Management & Module Mini-Exam
9% of the exam - about 2.5 hours - 14 practice questions
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What a change order actually costs
A change is not just the direct cost of the added work. A defensible change order price has several components, and the exam expects you to recognize when one is missing or improperly stacked.
Direct costs are labor, material, and equipment for the changed work itself.
Indirect or field overhead covers the project-specific costs of running the site, such as supervision, temporary facilities, and site utilities. If a change extends the duration, extended field overhead is a legitimate cost. If it does not extend duration, it usually is not.
Home office overhead is the contractor's general business cost. It is normally recovered through markup. Where a compensable delay prevents the contractor from taking on other work, some jurisdictions allow unabsorbed home office overhead claims, sometimes calculated by the Eichleay formula. This is contested and jurisdiction-dependent, and the exam generally tests that you know it exists and is disputed rather than expecting you to compute it.
Profit is applied as a percentage, with the allowable rate usually capped by the contract.
Impact or ripple costs are the hardest category and the most often overlooked. A change can reduce productivity on unchanged work by disrupting sequence, causing trade stacking, forcing out-of-season work, or triggering acceleration. These costs are real but hard to prove, which is why contracts often require that they be identified at the time of the change rather than claimed later.
How a change order is priced: four common methods
Contracts typically authorize one or more of four pricing methods for a change, and the exam expects you to recognize which fits which situation. Lump sum pricing sets a fixed total for defined, well-understood scope; it puts the estimating risk on whoever proposed the number, so it is only appropriate when the added scope is clear enough to price accurately. Unit price pricing uses a pre-agreed rate per unit of measure (per cubic yard, per linear foot) for work whose quantity is not yet known, letting the final cost track actual quantity installed rather than a guess. Time and materials, sometimes called force account, pays actual labor hours, material cost, and equipment time at agreed rates plus markup; it is used when scope truly cannot be defined well enough to price any other way, and it shifts most of the estimating risk to the owner, which is exactly why contracts usually cap it with a not-to-exceed ceiling and require detailed daily tickets. A guaranteed maximum price (GMP) change adjusts the GMP itself, typically on a CMAR contract, and is negotiated much like a lump sum but explicitly ties back to the project's overall cost ceiling.
Markup stacking
Markup stacking deserves attention. When a subcontractor marks up its own work and the general contractor marks up the sub's total, the compounding can be substantial. Most contracts limit the markup a contractor may apply to subcontracted work, often to a lower percentage than for self-performed work. A CM reviewing a change order checks the contract's markup provisions rather than accepting whatever was submitted.
The CM's review standard
The CM does not simply pass along a contractor's number. The CM prepares or commissions an independent estimate of the change, compares it to the contractor's proposal, and negotiates the difference. On the exam, when a question asks what the CM should do with a change order proposal, preparing an independent estimate is almost always part of the correct answer.
Value management versus cost cutting
These are different, and the exam draws the distinction sharply. Value engineering or value management seeks the required function at lower total cost, usually through a structured job plan. The classic sequence runs: information gathering (learn the design and its constraints), function analysis (state what each element must do), creative idea generation (brainstorm alternatives without judging them yet), evaluation (rank the ideas realistically), development (turn the surviving ideas into a costed proposal), and presentation (bring the recommendation to the decision-maker). Function analysis is the heart of it, and it is typically expressed in a verb-noun pair such as "support load" or "control temperature." The point is to identify what a component must do, then ask whether a cheaper way exists to do the same thing.
Cost cutting simply removes scope or quality. Deleting the landscape package is not value engineering, it is a scope reduction, and it should be reported to the owner as a reduction in what they are getting.
The best value opportunities occur early, during design, when changes are cheap. The classic curve shows the ability to influence cost falling steeply as the project progresses while the cost of making changes rises. A value study during construction documents is largely too late to capture the big wins.
This single curve explains why a value study during construction documents is largely too late, and why early CM involvement is worth paying for. Decisions made in design are cheap to change; the same decision in construction is not.Ability to Influence Cost versus Cost of Change
Why this matters for the exam
Change order questions usually test one of three things: whether you can name the missing or misapplied cost component, whether you can match the pricing method to how well the scope is actually defined, or whether you can tell value engineering (preserving function, cutting cost) apart from a disguised scope cut.
Practice Questions
1. A change adds work but does not extend the project duration. Extended field overhead is:
Always recoverable as a percentage of the change's direct cost, whether or not time is added
Recoverable at double rate
Recoverable only from the owner's contingency
Generally not recoverable, since the duration did not extend
Answer: d. Field overhead is time-based. If the duration did not extend, the contractor did not incur additional supervision, trailer, or general conditions cost, so there is nothing to recover.
2. Unabsorbed home office overhead on a compensable delay is sometimes calculated using:
The S-curve
The critical path method
Earned value
The Eichleay formula
Answer: d. Note that its acceptance is jurisdiction-dependent and contested.
3. A contractor submits a change order applying its full self-performed markup rate to subcontracted work. The CM should:
Accept it as submitted
Reject the change entirely and require the contractor to resubmit with no markup at all
Refer it to the architect
Check the contract's markup provisions, which commonly cap subcontract markup lower
Answer: d. Most contracts cap markup on subcontracted work at a lower rate than self-performed, because the contractor is coordinating rather than executing. The CM's job is to check the provision, not to accept or reject reflexively.
4. Deleting the landscape package to save money is:
Function analysis
A scope reduction that should be reported to the owner as reduced deliverable
Value engineering, because the owner's budget goal is met without touching the structure
An allowance adjustment
Answer: b. Value engineering preserves function at lower cost. Deleting the landscape package removes function entirely. That is a scope reduction, and the owner is entitled to know they are getting less building, not a cleverer one.
5. In a value engineering job plan, function is typically expressed as:
A verb-noun pair such as "support load"
A schedule activity
A specification section reference that identifies the product and its performance standard
A dollar figure
Answer: a. Function is expressed as a verb plus a noun, such as support load or exclude water. Stripping the description down to the function is what lets the team ask whether a cheaper element could do the same job.
6. Value management opportunities are greatest:
Early in design, when influence over cost is highest and change is cheapest
During punch list
During closeout
After substantial completion, when the actual operating costs of the systems can finally be measured
Answer: a. Early in design, almost nothing is committed and changes cost drawing time. Later, the same idea costs demolition and rework. Influence is highest exactly when the cost of exercising it is lowest.
7. Presented with a contractor's change order proposal, the CM should first:
Add it to contingency
Forward it to the owner for payment
Prepare an independent estimate of the change for comparison
Reject it pending legal review, then require the contractor to resubmit with full cost backup
Answer: c. An independent estimate is the CM's only real negotiating position. Without it the CM is arguing about a number with no basis for disagreement.
8. Impact or ripple costs are difficult to recover primarily because:
They do not exist
They are real but hard to prove, so contracts often require identification at the time of change
They are covered by retainage, which the owner holds to pay for productivity losses on unchanged work
They are prohibited by contract
Answer: b. Ripple costs, lost productivity, trade stacking, out-of-sequence work, are genuine but hard to isolate from other causes. That difficulty is why contracts usually require them to be identified and priced at the time of the change.
9. The quantity of added work is not yet known, but the rate per cubic yard was agreed before the work began. This change should be priced as:
Time and materials with no ceiling
Unit price
A GMP adjustment only
Lump sum
Answer: b. Unit price lets the final cost track actual installed quantity against a pre-agreed rate, which fits a case where quantity, not rate, is the unknown.
10. Time and materials (force account) pricing is generally used when:
A GMP contract prohibits any other pricing method
Scope is well defined and can be priced accurately in advance
Scope cannot be defined well enough to price any other way, so actual costs plus markup are paid instead
The owner wants to shift all estimating risk to the contractor
Answer: c. Time and materials exists for genuinely undefinable scope. It shifts estimating risk toward the owner, which is why contracts typically cap it with a not-to-exceed ceiling and require daily tickets.
11. Why do most owners require a not-to-exceed ceiling on time-and-materials change work?
It is required on every contract type regardless of pricing method
Because time and materials shifts estimating risk to the owner, and a ceiling caps that exposure
Because time and materials is otherwise illegal
To increase the contractor's profit
Answer: b. Without a ceiling, an owner paying actual cost plus markup has no upper bound on exposure. The not-to-exceed cap and daily ticket requirement exist to manage exactly that risk.
12. The first two steps of the value engineering job plan, in order, are:
Information gathering, then function analysis
Evaluation, then creative idea generation
Function analysis, then information gathering
Presentation, then development
Answer: a. The job plan starts by learning the design and its constraints, then states what each element must actually do, before any alternatives are generated.
13. A GMP change order on a CMAR contract differs from an ordinary lump sum change primarily because it:
Applies only to unit price work
Is never subject to negotiation
Explicitly adjusts the project's overall guaranteed cost ceiling, not just a single line item
Cannot include profit
Answer: c. A GMP change is negotiated much like a lump sum, but it is tied directly to the contract's overall guaranteed maximum price rather than standing alone.
14. A creative idea generated during a value engineering session is rejected without being ranked or discussed, in the same session it was proposed. This violates which job plan principle?
There is no fixed sequence to the job plan
None; ideas should be filtered immediately
Creative idea generation should not be judged in the same step it happens; evaluation is a separate, later step
Function analysis must come after evaluation
Answer: c. Judging ideas as they are proposed suppresses the brainstorming the creative step depends on. Evaluation is deliberately a separate, later step in the job plan.
Glossary
Field overhead
Project-specific cost of running the site (supervision, temporary facilities, utilities); time-based, so it only extends when duration extends.
Home office overhead
The contractor's general business cost, normally recovered through markup rather than itemized per change.
Eichleay formula
A contested, jurisdiction-dependent method sometimes used to calculate unabsorbed home office overhead during a compensable delay.
Value engineering
Structured process to achieve the required function at lower total cost, distinct from cutting scope or quality.
Impact/ripple costs
Lost productivity on unchanged work caused by a change; real but hard to prove without contemporaneous identification.
Unit price
A pre-agreed rate per unit of measure, used when quantity, not rate, is the unknown at time of change.
Time and materials (force account)
Pricing at actual labor, material, and equipment cost plus markup, typically capped by a not-to-exceed ceiling.
Function analysis
Stating what a design element must do, typically as a verb-noun pair, as the basis for finding a cheaper way to do the same job.