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A201™- 2017 General Conditions of the Contract for Construction

G701-2017 Change Order

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August 17, 2022

Understanding the treatment of a contractor’s overhead and profit on change orders—whether deductive or net increase—can help ensure fair compensation and avoid confusion during construction projects. This article will explain how to handle overhead and profit based on the AIA 201™-2017 General Conditions, particularly Section 7.3.8. We will explore two common change order scenarios to better understand how overhead and profit should be calculated. 

What Does Section 7.3.8 of the AIA General Conditions Say About Overhead and Profit? 

Section 7.3.8 of the AIA 201™-2017 General Conditions provides clear guidelines for determining the contractor’s overhead and profit in change orders. It states: 

• Deductive Change Orders: The credit given to the Owner for any deletion or change resulting in a net decrease in the Contract Sum should be based on actual net cost as confirmed by the Architect. 

• Net Increase Change Orders: When both additions and deletions are involved in a change, overhead and profit should be calculated based on the net increase in the Contract Sum. 

Understanding these terms is key to ensuring that contractors are fairly compensated for both the work they perform and the overhead costs they incur during the project. 

Scenario 1: The Deductive Change Order 

Imagine you’ve received a change order request to reduce the paint scope of work from three different colors to a single color. This change reduces the overall Contract Sum, resulting in a net decrease.  

Retaining Overhead and Profit for a Net Decrease 

Even though the scope is being reduced, Section 7.3.8 ensures that you, as the contractor, can retain your overhead and profit associated with the work removed. Why is this the case? 

Your overhead costs represent your business’s general operating expenses, which are not specifically tied to one particular project. These costs may have already been incurred during the bidding process or when coordinating subcontractors, estimating work, or scheduling. Since these overhead costs are already spent, it would be unfair for the Owner to take them away, even when the scope is reduced. Therefore, you should maintain the overhead and profit associated with the original scope of work. 

Scenario 2: The Cumulative Change Order – Net Increase 

In this case, you receive a change order request to reduce the paint colors from three to one, but this time, you’re also instructed to add an additional sheen to specific areas of the building. As a result, the overall Contract Sum increases, leading to a net increase. 

Adding Overhead and Profit for a Net Increase 

In this scenario, since the Contract Sum has increased, Section 7.3.8 allows you to include overhead and profit based on the net increase. Why is this important? 

The Contract Sum originally agreed upon between you and the Owner accounted for the overhead and profit needed to estimate, schedule, and perform the work as initially proposed. When the scope expands—requiring additional work and resources—it’s only fair to include an additional allowance for overhead and profit that reflects the increased effort and costs associated with the new work. 

AIA Change Order Management Documents 

Did you know that AIA provides various documents to help manage change orders efficiently? At AIA Contract Documents, you can find tools like the AIA Document G701-2017, which is the official Change Order form, along with other useful variations for projects with subcontractors, design-builders, or construction managers. 

By using these resources, you can better understand and manage the financial aspects of change orders, ensuring that both you and your client are on the same page when it comes to overhead, profit, and contract adjustments. 

Understanding the treatment of overhead and profit in change orders is crucial for contractors, whether dealing with a deductive change order that decreases the Contract Sum or a net increase that adds to the scope of work. By adhering to the guidelines set forth in Section 7.3.8 of the AIA 201™-2017 General Conditions, contractors can ensure that their overhead costs and profits are calculated fairly, regardless of changes to the scope of work. 

For more detailed information on managing change orders and other related documents, be sure to explore the resources available on the AIA Contract Documents website. 

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.