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 calculating change orders, contractors must add their standard markup for overhead and profit to the base cost. The $50,000 represents the direct cost of the additional work. With a 15% markup: $50,000 × 0.15 = $7,500 markup. The total change order amount becomes $50,000 + $7,500 = $57,500. This ensures the contractor maintains profitability on change work consistent with their original contract terms.
Why the Other Options Are Wrong
Option A: $52,500
$52,500 represents only a 5% markup ($50,000 × 0.05 = $2,500), which is significantly below the contractor's standard 15% markup rate. This would result in inadequate compensation for overhead and profit on the change order work.
Option B: $60,000
$60,000 represents a 20% markup ($10,000 ÷ $50,000 = 20%), which exceeds the contractor's standard 15% markup rate. While this might seem favorable to the contractor, it's inconsistent with established contract terms and could create disputes.
Option D: $50,000
$50,000 represents only the base cost without any markup for overhead and profit. This would mean the contractor performs additional work without compensation for business expenses and profit, which is financially unsustainable.
Memory Technique
Remember 'Change + Charge': Change orders need the contractor's standard markup charge added to maintain profit margins, just like the original contract.
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