By Alisa Schneider, Esq., Manager and Counsel, AIA Contract Documents
August 17, 2022
This article will briefly describe the treatment of the contractor’s overhead and profit on both deductive change orders and net increase cumulative change orders. Specifically, this article will review Section 7.3.8 of the AIA 201™-2017 General Conditions which states, in relevant part:
The amount of credit to be allowed by the Contractor to the Owner for a deletion or change that results in a net decrease in the Contract Sum shall be actual net cost as confirmed by the Architect. When both additions and credits covering related Work or substitutions are involved in a change, the allowance for overhead and profit shall be figured on the basis of net increase, if any, with respect to that change.
Scenario 1 – The Deductive Change Order
You received a change order request to change the paint scope of work by reducing the paint color from three different colors to one single color. As a result of this reduction in paint color, there is a net decrease in the Contract Sum.
Retaining Overhead and Profit for a Net Decrease
After reading Section 7.3.8, you know that the deduction from the Contract Sum will be calculated by using the actual net cost of the work removed from the scope, and you will keep your original overhead and profit associated with the descoped work. So, why is that?
Your overhead represents the cost of doing business and is not necessarily chargeable to one specific project. If the Owner reduces the scope of work, there is a good chance that you already spent your overhead costs during the time you reviewed, selected, and retained the subcontractor, or estimated and coordinated the work for the project. If the Owner chooses to reduce your scope of work, then it would be unfair to deprive you of the overhead and associated profit for the overhead costs you have already incurred.
Scenario 2 – The Cumulative Change Order – Net Increase
You received a change order request to change the paint scope of work by reducing the paint color from three different colors to one single color; however, this time, you are instructed to add an additional sheen of that color to specific areas of the building. As a result of this cumulative change in the paint scope of work, there is a net increase in the Contract Sum.
Adding Overhead and Profit for a Net Increase
After reading Section 7.3.8, you know that you can include an amount of overhead and profit in your change order, so long as it is based on the amount of the net increase in the Contract Sum. So, why is that?
The Contract Sum you agreed upon in your contract for construction included the overhead and profit that would compensate you for your efforts to estimate, schedule, and perform the work as proposed. To the extent that you are requested to perform new work that exceeds the Contract Sum, it would be fair for you to include the additional overhead and profit associated with the net increase in the Contact Sum.
Did you know the AIA offers change order management documents? At https://www.aiacontracts.com/, you can find not only the AIA Document G701-2017, Change Order, but also other variations that can be used with subcontractors, design-builders, and projects with construction managers.
AIA Contract Documents has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice and does not create an attorney-client relationship of any kind. This article is also not intended to provide guidance as to how project parties should interpret their specific contracts or resolve contract disputes, as those decisions will need to be made in consultation with legal counsel, insurance counsel, and other professionals, and based upon a multitude of factors.