Calculating the Cost of a Change

Presented By:J. Scott Lowe, P.E.

Trauner Consulting Services, Inc.

This manual was created for online viewing. State specific information in this manual is used for illustration and is an example only.

mail: P.O. Box 509 Eau Claire, WI 54702-0509 • telephone: 866-352-9539 • fax: 715-833-3953email: customerservice@lorman.com • website: www.lorman.com • seminar id: 390336

Calculating the Cost of a Change

© 2012 Lorman Education Services. All Rights Reserved.

All Rights Reserved. Lorman seminars are copyrighted and may not be recorded or transcribed in whole or part without its express prior written permission. Your attendance at a Lorman seminar constitutes your agreement not to record or transcribe all or any part of it.

This publication is designed to provide general information on the topic presented. It is sold with the understanding that the publisher is not engaged in rendering any legal or professional services. The opinions or viewpoints expressed by faculty members do not necessarily reflect those of Lorman Education Services. These

materials were prepared by the faculty who are solely responsible for the correctness and appropriateness of the content. Although this manual is prepared by professionals, the content and information provided should not be used as a substitute for professional services, and such content and information does not

constitute legal or other professional advice. If legal or other professional advice is required, the services of a professional should be sought. Lorman Education Services is in no way responsible or liable for any advice or information provided by the faculty.

This disclosure may be required by the Circular 230 regulations of the U.S. Treasury and the Internal Revenue Service. We inform you that any federal tax advice contained in this written communication (including any attachments) is not intended to be used, and cannot be used, for the purpose of (i) avoiding federal tax

penalties imposed by the federal government or (ii) promoting, marketing or recommending to another party any tax related matters addressed herein.

mail: P.O. Box 509 Eau Claire, WI 54702-0509 • telephone: 866-352-9539 • fax: 715-833-3953email: customerservice@lorman.com • website: www.lorman.com • seminar id: 390336

Prepared By:J. Scott Lowe, P.E.

Trauner Consulting Services, Inc.

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Calculating the Cost of a ChangeCalculating the Cost of a Change

Instructor: Scott Lowe, P.E.

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Lorman Education ServicesProvider Number – J206

Calculating the Cost of a ChangeCourse Number - 109033

J. Scott Lowe, P.E.October 11, 2012

Credit(s) earned on completion of this course will be reported to AIA CES for AIA members. Certificates of Completion for both AIA members and non-AIA members are available upon request.

This course is registered with AIA CES for continuing professional education. As such, it does not include content that may be deemed or construed to be an approval or endorsement by the AIA of any material of construction or any method or manner ofhandling, using, distributing, or dealing in any material or product._______________________________________

Questions related to specific materials, methods, and services will be addressed at the conclusion of this presentation.

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© 2012 Lorman Education Services. All Rights Reserved.Lorman programs are copyrighted and may not be recorded or transcribed in whole or part without its express prior written permission. Your attendance at a Lorman program constitutes your agreement not to record or transcribe all or any part of it. This publication is designed to provide general information on the topic presented. It is sold with the understanding that the publisher is not engaged in rendering any legal or professional services. Although this manual is prepared by professionals, it should not be used as a substitute for professional services. If legal or other professional advice is required, the services of a professional should be sought.

This disclosure may be required by the Circular 230 regulations of the United States Treasury and the Internal Revenue Service. We inform you that any federal tax advice contained in this written communication (including any attachments) is not intended to be used, and cannot be used, for the purpose of (i) avoiding federal tax penaltiesimposed by the federal government or (ii) promoting, marketing or recommending to another party any tax related matters addressed herein.

The opinions or viewpoints expressed by the faculty members do not necessarily reflect those of Lorman Education Services. These materials were prepared by the faculty members who are solely responsible for their correctness and appropriateness.

Changes on construction costs are inevitable. That means that often-difficult negotiations of the appropriate price for the change are also inevitable. The objective of this live audio conference is to help systematically strip away the mystery, the magic, the misconceptions, and the uncertainty surrounding the pricing of changes. Contractors will learn what they must include to be made whole. Owner’s will learn both what they should pay and what they shouldn’t pay. CMs, attorneys, and the consultants and accountants that advise them will learn what is needed to accurately and persuasively price a change. We will focus on the hard topics – the legitimate damages associated with delay, the real costs of inefficiency, the balancing concerns when pricing acceleration. We will also touch on the sometimes controversial areas of unabsorbed home office overhead, interest, and consequential damages..

CourseDescription

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LearningObjectives

At the end of the this course, participants will be able to:

1. You will be able to define methods of calculations.

2. You will be able to recognize delay costs.

3. You will be able to discuss acceleration costs.

4. You will be able to review mitigation of delays and

damages.

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Meet Your Instructor

Scott Lowe, P.E.

Principal

30 years experience

Professional Engineer

Instructor, Scheduler, Author, Analyst, Expert Witness

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What Will I Learn Today?

Methods of Calculation

Direct labor, material, and equipment costs and mark ups

Delay Costs

Acceleration Costs

Inefficiency Costs

Consequential Damages

Mitigation of Delays and Damages

Changes

1. A change is the widely used construction industry term used to describe the modification of a construction contract.

2. Changes are inevitable on most construction projects.

3. Construction contracts are designed to allow for changes.

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Types of Changes

1. Added or Extra Work

2. Differing Site Conditions

3. Suspensions of Work

4. Elimination of Work

5. Time Extensions

6. Other types

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Basic Approaches to Pricing Changes

1. “Forward Pricing”

2. Pricing changes after the change work is performed

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Methods of Calculation

Estimates

Contract-Based Approaches

Actual Cost

Total Cost and Modified Total Cost Approaches

Methods of Calculation – Estimates

1. Estimates are a “forward-pricing” method.

2. Estimating a cost is still the most common and, in many cases, the preferred approach to determining the price of a change.

3. Allows for the execution of bilateral agreements before the changed work is performed.

4. Requires a reasonably defined scope of work

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Methods of Calculation – Contract

1. Similar terms – time and materials, cost plus, force account.

2. May be used when the scope of work of the change is unknown.

3. May also be used when the parties cannot agree on a price.

4. Often requires detailed documentation.

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Methods of Calculation – Actual Cost

1. Similar term – equitable adjustment

2. Differs from contract-based approaches because there is often no contract-mandated “formula” for calculation of costs.

3. May require auditing of cost records.

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Methods of Calculation – Total Cost

1. Often used with some reluctance.

2. Use typically requires establishing the validity of four assumptions;

Bid is reasonable

Costs incurred were reasonable

All added costs are the owner’s responsibility

Nature of change makes documentation of the actual costs of the change impossible.

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Methods of Calculation – Total Cost

1. When the total cost calculation is modified to address errors in the bid or other problems with a strict accounting based on total cost, the result is often called a modified total cost approach.

2. The modified total cost approach rests on assumptions otherwise identical to the total cost approach.

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Basic Change Order Pricing Scheme

1. Labor Costs

2. Material Costs

3. Equipment Costs

4. Mark ups for overheads

5. Mark up for profit

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Labor Cost Components

1. Labor Hours

2. Labor Rates

3. Labor Burdens

Vacation and Holidays

Health Insurance

Retirement

Worker’s Compensation Insurance

Taxes

Other

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Equipment Cost Components

1. Equipment Usage

2. Equipment Rates

Owned

Rented

Operating Costs

3. Mobilization and Demobilization Costs

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Equipment Cost Guides

1. Rental Rate Bluebook Published by EquipmentWatch

2. Widely-used guide

3. Represents costs of ownership

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Material Cost Components

1. Quantity

2. “Unit” price

3. Delivery and handling costs

4. Expediting Fees

5. Storage Expenses

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Overhead Cost Components

1. Field Office Costs – Costs incurred by a contractor to maintain its operations in the field

2. Home Office Costs – Costs incurred by a contractor at its “main” or “central” office to support construction in the field

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Field Office Cost Components

1. “Office” costs

Office rent

Utilities

Office supplies

Etc.

2. Labor Costs

Project Manager

Superintendent

Clerical Support

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Home Office Cost Components

1. “Office” Costs

Office Rent

Utilities

Etc.

2. Labor Costs

Senior Management – President, VPs

Administrative Personnel

Estimating and Engineering Staff

Etc.

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Methods for Pricing Overhead and Profit

1. Field Office Overhead

Percentage mark up

Itemized cost

2. Home Office Overhead

Percentage mark up

Allocation formula

3. Profit – Percentage mark up

Sometimes applied on a sliding scale

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“Impact” Costs

1. Delay

2. Acceleration

3. Inefficiency

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Legal Considerations

The legal standard regarding damages calculations is easy to state, but sometimes difficult to implement.

“Damages need not be calculated with absolute certainty, but…

they may not be based upon speculation.”

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Delay Costs – Labor

Idle Labor – labor hours, times rate, plus burden, and mark ups

Extended Labor – same

Labor Cost Escalation – based on differential

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Delay Costs – Equipment

Idle Equipment – Usage, times rate, plus mark ups, if allowed

Extended equipment – Same

Consider mitigation

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Delay Costs – Material

Material Cost Escalation

Storage

Additional handling costs

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Field Overhead Costs

Field Overhead costs associated with delay typically consist of time-dependent costs chargeable to the project, but not chargeable to a particular item of work

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Home Office Overhead Costs

1. It is often difficult to identify a home office cost that increases because of a delay.

2. However, the issue is often more related to a question of “under absorption” than it is an increase in costs.

3. Recovery is controversial and heavily dependent on legal precedent at the Federal level

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Eichleay Formula

Actual Contract Billings

Total Actual Overhead During Actual Contract

Period

Allocable OverheadTotal Actual

Company Billings

x =

Allocable Overhead Daily

OverheadTotal Days of Contract Performance Including Delay

=

Daily Overhead

Days of Compensable Delay

Unabsorbed Overhead

x =

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Canadian Method

Determine % of home office overhead

Multiply % by contract amount

Divide by contract duration

Multiply by days of compensable delay

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Acceleration Costs: Labor

Premium Time

Inefficiency

Savings

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Acceleration Costs: Equipment

No Equipment Premium Cost

Owned Equipment

Rental Equipment

Added Equipment

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Acceleration Costs: Material

Additional materials incorporated into finished product

More costly means and methods

Additional temporary materials

Expediting costs

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Acceleration Costs: Overhead

Additional supervision costs, potentially

Shorter duration = Lower overhead (typically)

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Definitions of Key Terms

Productivity is Work Performed/ Resources Expended

Inefficiency is based on a comparison of productivities

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Definitions of Key Terms

An Inefficiency Factor is the number (usually expressed as a percentage) used to express the magnitude of the inefficiency.

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Methods of Measuring Inefficiency

Measured Mile (Preferred)

Comparison with other projects (If necessary)

Comparison with bid, estimate, or plan (When no comparison is available)

Use of experts (To be avoided)

Use of published standards (To be avoided)

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Inefficiency Costs

Inefficiency costs should be kept distinct from acceleration costs

Labor costs are determined by multiplying the inefficiency factor times actual labor hours during the inefficient work period.

The equipment used and operated by the inefficient labor is also inefficient

Guard against “double-dipping”

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Other Costs

Know how your contract documents address reimbursement for these costs

1. Profit and “anticipated” profit

2. Interest

3. Bond

4. Legal and consulting fees

5. Estimating, surveying, and engineering costs

6. “Consequential” costs or damages

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Mitigation of Costs

Obligated to mitigate

Obligated to respond in a reasonable and prudent manner

Should re-sequence operations, if necesary

Allocate resources cost-effectively

Maintain and protect materials

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For More Information:

Please contact Scott Lowe at:

1617 JOHN F. KENNEDY BLVD.SUITE 600PHILADELPHIA, PA 19103Phone: (215) 814-6400Fax: (215) 814-6440

scott.lowe@traunerconsulting.com

www.traunerconsulting.com

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Course Evaluations

In order to maintain high-quality learning experiences, please access the evaluation for this course by logging into CES Discovery and clicking on the Course Evaluation link on the left side of the page.

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This concludes The American Institute of Architects Continuing Education Systems Course

Lorman Education Services

Michelle Shepherd – C.E. Coordinator

mshepherd@lorman.com

Thank you for choosing Lorman Education Services for your continuing education needs.

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Notes