How to protect margin on change orders

Record who requested the change, when it was requested, what communication carried it, and whether that person has authority under the contract. Save the original direction, drawing, field notice, request for quotation, email, meeting record, or portal entry. Distinguish a request to price from an authorization to proceed. If the instruction is verbal, document the substance promptly through the permitted channel and ask for confirmation.

Assign a unique change reference that follows the item through estimate, proposal, approval, work, invoice, and reconciliation. Do not let several unrelated requests merge into a single catch-all number. Equally, do not fragment one coherent change so severely that its total schedule and coordination impact disappears. The identifier is useful only when everyone uses it consistently and the original evidence remains connected.

• Requester, date, time, and communication source
• Contract or project reference
• Pricing request, field direction, or authorization status
• Required response date and stated work deadline
• Named internal owner and required approver

Start from the accepted scope and identify additions, deletions, substitutions, relocations, quantity changes, sequence changes, and new constraints. A change is not just the new work. It is the difference between the controlled baseline and the revised requirement. Without that comparison, the estimate can include work already carried or omit cost created by removing and replacing completed work.

Write a short change narrative that a person outside the immediate conversation can understand. Reference the affected areas and documents. State assumptions and exclusions that are necessary to price the boundary. If design information is incomplete, separate confirmed work from allowances or options. Avoid language such as “all required work” when the requirement is still developing. Precision at this stage protects both the customer conversation and the internal cost basis.

Price direct material, direct labour, equipment, subcontractors, supplier services, freight, taxes, permits, testing, disposal, temporary work, and other supported direct costs. Then consider the indirect impact allowed by the contract and company rules, such as supervision, coordination, engineering, project management, mobilization, access, small tools, safety, and closeout documentation. The proper categories depend on the work and agreement.

Use current supplier evidence and identify its validity, currency, freight basis, lead time, and revision. If field work has already started, separate actual cost to date from forecast cost to complete. Timesheets, tickets, delivery slips, purchase commitments, and subcontractor quotes should connect to the change reference. An unsupported round number may be fast to enter, but it is hard to defend and nearly impossible to reconcile later.

A scope change can alter sequence, crew size, access, overtime, remobilization, procurement timing, and trade coordination even when the material quantity is small. Identify these effects separately from direct quantity changes. Explain the basis, such as added shifts, interrupted work, restricted access, or a revised completion milestone. Do not hide a schedule allowance inside labour hours without a note that a reviewer can test.

Avoid automatic productivity percentages that have no connection to the event. If productivity loss is claimed or carried, tie it to observable conditions and the contract process. Keep contemporaneous field records. Photographs, daily reports, location, crew composition, hours, and disrupted activities can be more useful than a retrospective narrative written months later. When the effect cannot yet be quantified, flag it and reserve the issue through the required notice path.

Identify the governing markup, fee, overhead, bond, tax, and escalation rules before calculating the selling price. The source may be the contract, an approved rate sheet, an Order Form, or company authority policy. Apply each rule to the correct base and in the correct order. A percentage applied twice or to the wrong subtotal can be as damaging as a missed percentage.

Keep cost, markup, margin, and customer price distinct in the internal record. Markup and margin are not interchangeable. If cost is CAD 10,000 and the selling price is CAD 12,500, the markup on cost is 25 percent while gross margin on selling price is 20 percent. The fictional arithmetic demonstrates the definitions only. Customer-facing documents should show the authorized customer price and scope, never the underlying cost, markup, margin, vendor identity, quote number, or item code.

On the fictional Harbour project, a customer requests two additional devices and relocation of an installed panel. Supported direct cost is CAD 7,200 for material and subcontract work, CAD 2,400 for labour, and CAD 900 for access equipment. An approved CAD 600 project-coordination allowance applies. The internal cost basis is CAD 11,100. The team then applies the pricing rules stated in its fictional contract rather than choosing an improvised round selling price.

The change narrative separates the two new devices from panel relocation, notes that wall repair by others is excluded, and states a lead-time assumption. A person approves the commercial decision before it is issued. When work finishes, actual supported cost is compared with the accepted CAD 11,100 basis by category. Harbour and every figure are fictional. The example shows the chain from requirement to cost, authorization, customer scope, and outcome.

Route the change through the authority required for its value, risk, and terms. The reviewer should see the instruction, baseline difference, scope narrative, cost evidence, pricing calculation, qualifications, schedule effect, and unresolved items. Approval is a decision, not the presence of initials somewhere in a file. Record the approver, timestamp, version, and decision so later revisions cannot be mistaken for the accepted state.

The customer-facing change proposal should use clear offered-scope language, identify the customer price and applicable tax treatment, state schedule or validity conditions, and reference the governing change. It must omit protected internal information. If the customer asks for a breakdown, provide only the authorized customer-facing structure. Do not forward supplier quotes or expose supplier identities merely because the change moved quickly.

Sometimes safety, schedule, or customer direction requires work before a final price is accepted. Use the contract's notice and authorization process. Record the approved not-to-exceed limit, time-and-material basis, daily ticket requirement, or other interim rule. State what is authorized and what remains subject to agreement. The commercial record should make the temporary basis unmistakable.

Capture actuals daily while the facts are available. Tag labour, material, equipment, purchase commitments, and subcontractor cost to the change reference. Have required field tickets reviewed through the agreed process without representing a signature as broader acceptance than it provides. Escalate when the limit or boundary is likely to change. Waiting until invoice time turns a manageable open item into a dispute assembled from memory.

At completion, compare actual cost with the accepted internal basis by meaningful category. Investigate variances in quantity, labour hours, productivity, supplier price, freight, equipment, and schedule. Also compare the proposed customer amount, accepted amount, invoiced amount, and collected amount where the business process permits. A priced change can appear profitable until an unbilled portion or collection issue is included.

Record why the result differed without rewriting the original estimate. The baseline is historical evidence. The outcome is a second state connected to it. Useful lessons may include a missed work category, an inaccurate production rate, a supplier boundary, or a contract rule that was applied inconsistently. Carry the lesson into templates and review checklists, but retain project-specific context so one unusual result does not become a universal assumption.

• Accepted baseline stays unchanged and reviewable.
• Actual costs use the same categories where practical.
• Customer approval, invoice, and result remain connected.
• Variance notes describe evidence, not blame.
• Reusable lessons are reviewed before becoming defaults.