How Should Labor Costs Be Calculated on a Change Order?

When a change order occur on public works construction project, how should the hourly costs associated with the labor element of the change order be calculated?

Calculating Hourly Labor Rates:  There are a couple of different methods:

Bid Item:  If the body of work included in the change order was a bid item in the original bid for the project, the bid item price (which may include labor and other costs), may be used to calculate the amount of the change order.

Unit Prices:  If the original bid included unit prices for labor rates for future change order work, these may be used as the basis of negotiating and calculating the labor amount for the change order.

Prevailing Wages:  The contracts or General Conditions of some agencies include language addressing the relationship of prevailing wages with the labor rate paid on change orders.  The hourly rate should not be artificially limited to just the prevailing wage rate, which may not account for the fact that a contractor may pay more than the prevailing wage rate in order to retain qualified workers, or that the contractor may be required to pay more than the prevailing wage rate based on the terms of a union collective bargaining agreement.  Besides the hourly rate actually paid to workers, the hourly labor cost typically includes other costs such as for workers compensation, federal and state taxes, and other amounts.

• State of Washington's Approach:  The State of Washington's General Conditions addresses this issue in a manner that initially pegs the labor rate to the rate the contractor includes on the "statement of intent to pay prevailing wage" document filed with the Department of Labor and Industries.  On this form, the contractor notes the hourly rate they intend to pay to workers in specific classifications, which may be higher than the prevailing wage rate.  The language further goes on to permit the Owner to pay more than the amount noted on the form.  Here's the language from the State's General Conditions:

"The hourly costs shall be based on the following...Hourly rates and benefits as stated on the Department of Labor and Industries approved "statement of intent to pay prevailing wages" or a higher amount if approved by the Owner."

Balancing Public and Private Interests:  There are a couple of keys in negotiating labor rates on a change order.  The hourly labor rate must:

1. Protect the public's interests by not being higher than what the contractor normally pays on an hourly basis for certain classifications of labor.
2. Fairly compensate the contractor for actual costs.  A contractor should not be required to work at less than their actual costs on change orders.

Check Your Contract Language:  How does your standard public works contract address calculation and negotiation of labor rates for change orders?  Work with your attorneys and policy makers to craft language that helps ensure that the public's interests are protected and is fair to contractors.

Mike Purdy's Public Contracting Blog 

© 2011 by Michael E. Purdy Associates, LLC 

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