The owner requests changes which will cost the contractor $15,000 in labor and materials and $2,250 in overhead costs, and the contractor would be relieved of $18,000 in labor and materials costs and $2,400 in overhead. The original bid included 20% profit on all costs. The contractor wants 20% profit on all costs for the changes. The adjusted contract price for the change order should be:

The owner requests changes which will cost the contractor $15,000 in labor and materials and $2,250 in overhead costs, and the contractor would be relieved of $18,000 in labor and materials costs and $2,400 in overhead. The original bid included 20% profit on all costs. The contractor wants 20% profit on all costs for the changes. The adjusted contract price for the change order should be:

• A. A decrease of $3,780
• B. An increase of $3,780
• C. No change in price
• D. A decrease of $2,000

Answer: (A)

Change orders adjust the contract price by accounting for both costs that are saved and costs that are added, including the profit built into those costs. Here, the change avoids 18,000 in labor and materials and 2,400 in overhead, totaling 20,400 in costs that would have carried 20% profit. That profit would have been 0.20 × 20,400 = 4,080. So removing these saved costs also removes the associated profit, a total reduction of 20,400 + 4,080 = 24,480 from the contract price. The change also introduces new work costing 15,000 in labor and materials and 2,250 in overhead, totaling 17,250, with 20% profit on those costs of 0.20 × 17,250 = 3,450. So this change adds 17,250 + 3,450 = 20,700 to the contract price. Net result: decrease of 24,480 plus increase of 20,700 = a decrease of 3,780. The adjusted contract price should be decreased by $3,780.

Change orders adjust the contract price by accounting for both costs that are saved and costs that are added, including the profit built into those costs.

Here, the change avoids 18,000 in labor and materials and 2,400 in overhead, totaling 20,400 in costs that would have carried 20% profit. That profit would have been 0.20 × 20,400 = 4,080. So removing these saved costs also removes the associated profit, a total reduction of 20,400 + 4,080 = 24,480 from the contract price.

The change also introduces new work costing 15,000 in labor and materials and 2,250 in overhead, totaling 17,250, with 20% profit on those costs of 0.20 × 17,250 = 3,450. So this change adds 17,250 + 3,450 = 20,700 to the contract price.

Net result: decrease of 24,480 plus increase of 20,700 = a decrease of 3,780. The adjusted contract price should be decreased by $3,780.