Change order markup a construction contract sets before signature governs the price of work that does not exist yet. It is negotiable for about a week, it is fixed for two years, and on most jobs nobody reads it until the first change arrives.
Why the markup clause is read last
Attention at signature goes to the number. The guaranteed maximum price is the headline, the schedule is the second question, and the clause describing how future changes will be priced is several exhibits back.
It also describes work nobody has agreed to yet, which makes it feel hypothetical. A markup on a change that may never occur is easy to defer.
On a job of any size, changes will occur. Between two and eight percent of the contract price on a well run project, considerably more where the design was incomplete at signature. The markup clause prices all of it.
The asymmetry is stark. Four percentage points on the markup stack, argued for an afternoon before signature, is worth more on a typical job than most of the line items anybody does argue about, and the argument is available exactly once.
Where the stack comes from
A change order price is rarely one markup. It is a stack, and the layers compound.
The sub subcontractor prices the work and adds overhead and profit. The subcontractor adds its own on top of that total. The general contractor adds its own on top of the subcontractor total. Each layer is applied to a number that already contains the layer below it.
Then there are the additions that are not called markup. A bond premium on the change value. An insurance percentage. General conditions applied as a percentage rather than as a measured cost. A fee on the fee, where the contract allows the construction management fee to apply to the marked up total rather than to the direct cost.
Individually each is defensible and most are standard. Stacked, a change with $100,000 of direct cost can arrive at $128,000 or at $115,000 depending entirely on language agreed months earlier.
The single largest item in most stacks is the one people notice least: the general contractor fee applied to a subcontractor price that already includes the subcontractor markup. That is the markup charged twice, and whether it is permitted is decided by one sentence.
The change order markup a construction contract should state, term by term
The percentage at each tier, stated separately, with a stated maximum for the total stack. A single combined figure is easier to agree and much harder to check.
Whether markup applies to marked up amounts, or only to direct cost. This is the sentence that decides the markup charged twice, and it is usually one line.
Labor rates by trade, as a schedule, including the burden and what the burden covers. Rates agreed at signature are competitive rates. Rates quoted at the time of a change are not.
Equipment rates, with a stated source and a monthly cap, since idle equipment on a change can be charged at a daily rate for a very long time.
What general conditions may be charged on a change, and whether they are measured or applied as a percentage. Percentage general conditions on a change is one of the easier items to have deleted.
The treatment of credits. Whether a deletion carries the same markup as an addition. It should, and frequently does not.
How a change gets classified in the first place is a separate and equally consequential question, covered in the cause written on a change order.
Why it cannot be fixed later
Before signature the contractor wants the job and you have an alternative, even a theoretical one. A request to separate the tiers and cap the stack is a normal commercial conversation.
After signature the terms are the contract. Changing them requires the contractor to accept a lower price on future work in exchange for nothing, at a point where you have no alternative and the crews are already mobilized.
There is a second effect that is easy to miss. A high markup stack changes behavior as well as price. It makes every change more expensive to instruct, which makes an owner reluctant to instruct changes that are worth making, which is a real cost that never appears anywhere as a number.
It also affects the contractor incentive around scope disputes, because an item resolved as a change order carries markup and the same item resolved as included scope does not. That is not an accusation of bad faith. It is simply what the terms reward, and terms tend to be followed.
The one moment the clause becomes negotiable again is a second guaranteed maximum price amendment, which happens on phased jobs and on projects where a substantial scope addition is priced separately. If that moment arrives, the markup terms are on the table with everything else, and they are worth more attention than the scope being added.
Short of that, the practical response after signature is to reduce the volume of change orders rather than their price. That means closing the scope gaps and capping the open exclusions early, which is a different exercise with the same arithmetic behind it and sits in the review packages.
A worked example
Illustrative figures. Not taken from any client project and not a quotation.
A $53 million guaranteed maximum price. The contract permits subcontractor overhead and profit of 15 percent, general contractor fee of 5 percent on the subcontractor total, bond at 1.2 percent and general conditions at 4 percent of the change value.
A change with $100,000 of direct subcontractor cost. Subcontractor adds 15 percent to $115,000. General contractor adds 5 percent on the marked up figure, so $5,750. Bond on the total, $1,450. General conditions at 4 percent, $4,860. Total $127,060.
The same change under terms agreed before signature: subcontractor 12 percent, general contractor fee of 4 percent applied to direct cost only, bond as actual, general conditions measured rather than applied as a percentage. Total $117,700.
Difference on one change: $9,360, or 7.4 percent. Across a change volume of $2.3 million on this project, roughly $214,000.
The entire saving came from two sentences: applying the fee to direct cost rather than to the marked up total, and measuring general conditions rather than applying a percentage.
What to do before you sign
- Find the change order pricing clause and read it before you read anything else in the exhibits.
- Require each tier of markup to be stated separately, with a cap on the combined stack.
- Require that markup applies to direct cost only, not to amounts already marked up.
- Require a labor rate schedule by trade, with the burden itemized.
- Require equipment rates with a named source and a monthly cap.
- Require general conditions on a change to be measured rather than charged as a percentage.
- Require credits to carry the same markup treatment as additions.
Item three is worth more than the other six combined on most jobs, and it is usually the shortest sentence on the page. It is also the one a contractor is most likely to concede, because it is a drafting default rather than a priced position.
What we do
We read the change order pricing terms before signature and model the stack against a realistic change volume for the project, so the argument is about dollars rather than about percentages. The output names each layer, what it is worth across the expected volume, and the specific language that would close it. The reading is part of the cost and change exposure assessment.
Questions people ask
What is a reasonable change order markup?
It varies by market, delivery method and the size of the job, so a fixed number is the wrong thing to hold. What matters more is the structure: tiers stated separately, a cap on the combined stack, and markup applied to direct cost rather than to amounts that already carry a markup.
Can markup terms be renegotiated after signature?
Only if the contractor agrees to accept less on future work for nothing in return, at a point where you have no alternative. In practice they are fixed at signature. That is why an afternoon spent on this clause before execution is worth more than most of the line item argument.
Should credits carry markup?
They should carry the same treatment as additions, otherwise a deletion returns less than the equivalent addition costs. Many contracts are silent or asymmetric on this point, and the asymmetry is usually a drafting default rather than a negotiated position, which makes it straightforward to correct.
This is general information about construction contracts and is not legal advice.