The Construction Change Order — An Owner’s Guide to Pricing, Markup and Your Rights

In a perfect construction project, you know every cost before you drive the first nail. In reality, however, scope changes, unforeseen conditions, material price shifts, and owner-requested revisions happen on nearly every project. It always results in a construction change order.

Navigating these changes requires a clear strategy, which is why this owner change order guide covers everything you need to know about pricing, markup, and your contractual rights.

Ultimately, a construction change order serves as the formal written document to capture those changes. It adjusts the contract price up or down in a legally binding way.

The problem for most owners isn’t that change orders exist. Rather, they simply don’t know what they have a right to see before they approve one. This change order guide helps you get there.

Never Accept a Lump Sum Change Order

The single most important rule for any owner reviewing a construction change order proposal: require itemized pricing, always.

A lump sum change order — one that gives you a single dollar amount with no breakdown — tells you nothing. You must verify exactly what the contractor charges you for. Furthermore, a lump sum creates an opening for costs that your original contract explicitly prohibits.

What you should require instead is a detailed, itemized Change Order Proposal (COP) that separates:

• Labor hours and labor costs by worker classification
• Material quantities and unit prices by line item
• Equipment rental costs, if applicable

This requirement applies to the prime contractor and every subcontractor and sub-subcontractor involved in the change. Markup rules in this construction change order guide and covered below — cascade down through all tiers.

How To Price Labor Costs

Change order labor costs should reflect the contractor’s actual cost per hour for the workers performing the changed work. This should include wages, fringe benefits, payroll taxes, and workers’ compensation insurance.

Who’s included: Only workers and working foremen directly performing the change order work. General superintendents, project managers, safety personnel, and supervision above the working foreman level do not count as a direct labor cost. Instead, the contractor’s overhead markup covers these positions.

Labor burden represents the employer’s actual cost for payroll taxes (FICA, Medicare, SUTA, and FUTA). It also includes union or other fringe benefits alongside workers’ compensation. After project completion, you can review this percentage. You can then make adjustments if the actual burden rate differed from the rate used in pricing.

How To Price Material and Equipment Costs

The contractor must price materials at their actual purchase cost. Specifically, this means the net amount after subtracting any trade discounts or volume rebates the contractor receives. Any prompt-pay discounts the contractor takes advantage of should come back to you. Vendors must itemize their quotes with unit prices per item. A lump sum quote from a supplier is not acceptable for change order pricing purposes.

Additionally, you may include equipment rental costs when the change genuinely requires a specific piece of machinery.

For contractor-owned equipment, a commonly used benchmark equals 75% of the monthly rate that the AED Green Book publishes. This industry-standard reference requires you to divide the rate by 176 hours to arrive at a maximum hourly rate. Therefore, total charges for owned equipment across all change orders face a general cap at 50% of the equipment’s fair market value. Fuel for owned equipment constitutes a separate direct cost.

Understanding Change Order Markup

This is where owners most often overpay — not because the work costs more, but because they failed to control the markup.

On self-performed work: the industry-standard maximum markup is 10% of direct costs. This covers field overhead, home office overhead, and profit combined.

On subcontractor work: industry standards typically limit the prime contractor to a 5% markup on the net cost of all subcontractor work.

The combined maximum: 10% on self-performed work and 5% on sub work. Total markup generally should not exceed 15% total on any change order.

That 15% is an all-in number. Consequently, this percentage accounts for every single non-direct project cost:

Home office expenses

• Project Management
• Superintendents above working foreman level
• Estimating
• Engineering
• Legal
• Accounting
• Insurance
• Pickup trucks
• Shop drawings
• Permits
• Warranty expense

Additionally, that same markup covers small tools with a cost under $600, so you should not see them as a separate line item.

Deductive Change Orders

When you remove scope from a project, the same markup rules apply in reverse. When a single change involves both additions and deletions, you must net the two figures first. Therefore, the contractor applies the markup percentage to the net amount, rather than multiplying the gross additions before subtracting deductions.

Here’s how that may look in practice:

Change Order Item	Amount
Added scope — electrical panel upgrade	+$4,200
Deleted scope — decorative exterior lighting removed	-$1,800
Net change before markup	$2,400
Markup (10% self-performed)	+$240
Total change order amount	$2,640

The contractor applies the markup to the $2,400 net — not to the $4,200 addition before you subtract the deletion. That distinction matters when the numbers get larger.

No Contingency Line Items

A change order proposal should not include a separate line item for “contingency“. Instead, the contractor must estimate and include labor unknowns directly in the labor hours. Likewise, they should factor material unknowns into the material cost estimates. Contingency as a standalone charge is a cost you can’t verify and shouldn’t pay.

Change Order Timing and Directives

Most contracts specify a defined window. This is typically a set number of calendar days — for contractors to submit change order proposals after receiving a directive. Unpriced change orders are a real schedule and cost management risk, so holding to that window matters.

If a contractor’s proposal is late or if work must start immediately, the owner or construction manager can direct the contractor to proceed. You can structure this directive on a cost-plus basis with an agreed not-to-exceed price. You must always confirm that direction in writing, with the formal change order to follow.

Your Right to Audit Change Order Pricing

Any well-drafted construction contract gives the owner the right to examine the contractor’s records. This includes payroll, invoices, and equipment records — to verify that change order pricing was accurate and compliant with contract terms. If a post-approval review uncovers inaccurate, incomplete, or non-compliant pricing data, you can process a price adjustment. Furthermore, that right extends to all contractor tiers — prime, sub, and sub-sub.

What to Ask Before You Approve Any Change Order

Before signing, you confirm the following:

• Did the contractor fully itemize the proposal — showing labor, material, and equipment separately?
• Did the contractor use labor rates consistent with the rates they submitted at contract award?
• Are material prices net of applicable trade discounts?
• Does the markup fall within contract-allowed limits — 10% self-performed, 5% on subs, 15% combined maximum?
• Is there a contingency line item that shouldn’t be there?
• Does the proposal address both the cost adjustment and any schedule impact?

A change order you understand is a change order you can manage.