During a project, the owner requests a change order that will add $50,000 to the contract value. The contractor's standard markup is 15% for overhead and profit. What should be the total change order amount?
Correct Answer
C) $57,500
The change order should include the contractor's standard markup for overhead and profit. $50,000 × 15% = $7,500 markup. Total change order = $50,000 + $7,500 = $57,500.
Why This Is the Correct Answer
When an owner requests a change order, the contractor is entitled to apply their standard markup for overhead and profit to the additional work cost. The base cost of $50,000 represents the direct costs of the additional work. The contractor's 15% markup ($7,500) covers overhead expenses and profit margin that would be associated with this extra work. Therefore, the total change order amount should be $57,500 to properly compensate the contractor.
Why the Other Options Are Wrong
Option A: $50,000
This option only includes the base cost of the additional work ($50,000) without any markup for overhead and profit, which would result in the contractor losing money on overhead costs and receiving no profit for the extra work.
Option B: $52,500
This amount ($52,500) would only represent a 5% markup ($2,500), which is significantly less than the contractor's standard 15% markup and would not adequately cover overhead and profit.
Option D: $60,000
This amount ($60,000) would represent a 20% markup ($10,000), which exceeds the contractor's standard 15% markup and would be an overcharge to the owner.
Memory Technique
Remember 'COP' - Change Orders include Costs + Overhead + Profit. Never forget to add the markup!
Reference Hint
Look up contract administration and change order procedures in the Business and Finance section of your reference materials.
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