Help with sample question

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    David Kaplan

    Francis,

    Boy I'm stumped by this one as well, and I say this because every single change order I've ever seen in 13 years reduced amounts as you describe - both the material/labor cost AND the OH & P are factored in.

    This being said - assuming there's not some error from this guide you're referencing here, we are apparently wrong, and here's why I think that is:

    I guess at the end of the day here, the Owner went and made this change to the project after the GC has already been hired.  The GC entered into this Contract under a total price for the Project, and assumed moving forward that he/she was going to be making X amount of overhead and profit for the total job.  Then all of a sudden the owner changes something through no fault of the GC - they simply want a different flooring material.  It appears that this contract is protecting the GC in this case, saying that he shouldn't have to lose overhead and profit that he was expecting to make on this whole project just because of a finish material.  He SHOULD have to reduce the contract sum by the cost of the material, yes, but apparently the overhead and profit should stay the same so that this bottom line for the project remains unchanged. 

    I say all this as a guess.  I've never seen this executed in real life.  And in fact, when change orders occur that result in MORE money being added to the project, you better believe that OH & P get included.

    I don't agree with answer B, but that's the best way I can explain it.

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    Francis Pham

    Hi David,

    My thoughts exactly. The math just isn't working for me. Material cost difference is covered. Maybe a way to think of it is 15% remains to contractor OH & P, then that amount is not included in a change order because there is no change to the OH & P? I'm not sure if thats correct either because there is a difference in the actual number (cost in dollars) of OH & P.

    Thanks for the response though.

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    William May

    Is this one of those questions that an NCARB monitor weighs in on?  If all we are doing is guessing, that's not productive?

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    William May

    ok what if:

    Following the "Per A201 7.3.8. the commentary states"..the amount of credit is determined by the cost that should have been incurred in executing the change by the contractor...

    "without decreasing the contractors overhead and profit"  - The initial amount is $786.75 - This amount isn't touched.

    But, the change of $5,245 - $3,265.50 = $1,979.50 IS what the credit should be.  The contractor gets to keep the initial OH&P of $786.75 but he is only entitled to $1,979.50.

    Does this reasoning make sense?

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    William May

    Isn't my thought what David suggested.  If we apply A201 7.3.8, that seems to be the correct answer?

    Help us O Great Pumpkin, we seek your wisdom.......

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    Kurt Fanderclai

    Francis and David --

    I believe you've both reasoned through this correctly in my understanding.

    7.3.8: "The amount of credit to be allowed by the
    Contractor to the Owner for a deletion or change that
    results in a net decrease in the Contract Sum shall be actual net
    as confirmed by the Architect. When both additions and credits
    covering related Work or substitutions are involved in a change,
    the allowance for overhead and profit shall be figured on the basic
    of net increase, if any, with respect to that change.  

    Essentially, if the change is a decrease, Contractor keeps OH&P.  (Generally fair, since the Contractor would have performed some proportionate service on the goods up to that point.)

    If the change is an increase, then the Contractor gets to figure in additional OH&P.

     

    Francis -- how is your studying going?  You always seem to ask really good questions -- getting down deep into the contracts....    nice!  

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    Francis Pham

    Kurt!

    Thanks for the response. I guess the issue that needs to be confirmed is what does the contractor get additional OH&P from? The price difference of just the material or just difference of OH&P or both? 

    Thanks for saying that. I thought I had this exam in the bag the last time. I felt that I knew the contracts front and backwards but I guess I didn't dig deep enough into it. I think the practice questions help. I always enjoy coming on here to read all the questions and comments. You guys help a TON.

    Happy Friday!

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    Kurt Fanderclai

    "I guess the issue that needs to be confirmed is what does the contractor get additional OH&P from? "
    Only on materials and install costs over the originally scheduled value of 5245.

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    Francis Pham

    Interesting. Thanks Kurt

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    Stephen Meier

    Thanks to those above, I now understand how credit COs are calculated in modifying the contract.

     

    But I want to clarify the other types of COs:

     

    • How does the Contractor get to figure in additional OH & P?

    ... if we approached this as if it were the opposite (i.e. VCT was originally spec'd, & Solstice decides they now want ceramic tile)... I assume we would have the folllowing:

    • there would be a change order adding cost to the contract in lieu of a credit
    • Contractor would get to figure in additional OH & Profit (^I assume 15% still, proportional to the cost of the new ceramic tile)

    Since cost of material increase alone is $1979.50, I know we include this. But how do we calc OH & Profit? Do we...

     

    1. Determine the cost difference of the C's OH & Profit for the materials & add this to the material difference?

    ($786.75) - ($489.83) = $296.92

    Therefore ($1979.50)  + ($296.92)= $2276.42

    [I realize this is just finding the difference between the total costs, but I am breaking it down to try to understand the change in OH & Profit]

    2. Add the OH & Profit associated with the ceramic tile on top of the original OH & Profit associated with the VCT (15%)? Then, add this to the material difference?

    ($786.75) + ($489.83) = $1276.58

     Therefore ($1979.50)  + ($1276.58)= $3256.08 

     

    In other words:

    Kurt's reasoning- makes sense to me for the original problem, but does it also apply in this scenario:

    "since the Contractor would have performed some proportionate service on the goods up to that point"

     

    Because the C may have performed some service on the VCT up to that point (submittals, general correspondence w/ manufacturers, etc) , then they have to turn around & do the same general work for the ceramic tile, are they entitled to the OH & P for both?

     

    I see logic to both methods above depending on if the Contractor has actually completed any work associated with the materials, so any guidance would be much appreciated. Thanks!

     

     

     

     

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    Stephen Meier
    • Almost forgot the other type of CO I've come across in studying but I'm uncertain if I have a complete understanding the appropriate circumstances for its use:

       

      Zero cost change orders

      • The example I've seen relating to this is changing previously selected colors (knowing that the change in color = same cost as original color)  
      • Seems like this is used when there is a change in the scope of work that needs documented & approved by all parties (that is, it is not a minor change in the work that the Architect can take care of on his/her own through an ASI) 

     

    Am I on the right track?

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    Fernando Mingo Jozami (Edited )

     

    Material                           Amount

    Tile                                 $5,245.00
    Vinyl                               $3,265.50
    -----------------------------------------------

    Net Reduction               $1,979.50
    -----------------------------------------------
    Change Order Price    $1,979.50

    When a material is substituted for a more expensive one (or less expensive), the amount of the change order is the net difference between the two materials.

     

     

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