Change order markup: the percentage is in your contract, not on the internet

Search for change order markup and you will get a number within two seconds. Ten percent overhead, five percent profit. Somebody will state it as if it were building code.

It is not. It is a contract term. On your jobs it might be that, it might be lower, it might be a single blended figure, and on one job in your drawer right now it is probably a figure your own estimator agreed to at buyout and nobody in the office has read since.

So the real answer to “what markup can I put on a change order” is: go read the subcontract for that job. This article is about what you will find when you do, what the cap does and does not cover, and the arithmetic that makes subs leave money on the table even when the percentage is right.

None of this is legal advice. Where a cap is ambiguous or a GC is reading it in a way that costs you real money, that is a question for your construction attorney, not for an article.

Three numbers people use interchangeably and shouldn’t

Cost is what the work costs you. Labor at a burdened rate, material, equipment, lower-tier subs.

Markup is a percentage added to that cost to produce a price.

Margin is the share of the final price that is not cost.

They are not the same, and the gap between markup and margin is where money quietly disappears. Fifteen percent markup does not give you fifteen percent margin. On $10,000 of cost, a 15% markup bills $11,500, and the $1,500 is 13% of the price, not 15%.

If what you actually want is a target margin, you divide instead of multiplying: cost divided by one minus the margin. For a 15% margin on $10,000 of cost, that is $10,000 ÷ 0.85 = $11,765.

So which one does your contract mean? Almost always markup on cost — the clause will say a percentage added to the cost of the work. Which means the contract has already decided that your realized margin is lower than the percentage in it. Know that going in, and stop being surprised by it at closeout.

Every figure in this article is round and invented to show the shape of the arithmetic.

Where your cap actually comes from

Four places, in this order:

1. The subcontract you signed. There is a changes provision, and somewhere in or near it is the allowance for overhead and profit on changed work. It may be one combined percentage, two separate ones, or a sliding set that drops as the change gets bigger. Pull the figure out and write it on the budget sheet for that job so nobody has to go looking at 4:40 on a Friday.

2. A separate exhibit. Plenty of GCs keep their markup schedule in an attachment rather than the body — a general conditions exhibit, a change order procedures page, or a one-page rate sheet. It governs even though it is stapled on the back.

3. The prime contract, flowed down. Many subcontracts include a flow-down clause that binds you to the terms the GC agreed with the owner. If the owner capped the GC at a figure, the GC will push a figure at or below it to you. That is also the reason a cap sometimes cannot be negotiated — the GC genuinely has nowhere to put the difference.

4. Your own quote’s terms. If nothing above speaks, what you wrote into your proposal is where the number lives. Which is a good argument for having markup terms in your standard quote language in the first place.

Figures you will often see are around ten percent for overhead and five percent for profit on self-performed work, with a smaller single figure on lower-tier sub work — but they vary by contract, owner, public or private work, and region. Treat that as a rough neighborhood, never as the answer. The answer is in your drawer.

What the cap covers, and what belongs in cost

This is the part that gets expensive, because a GC’s reviewer and a sub’s PM often disagree about which bucket an item is in — and the sub is the one who loses by guessing.

How your contract defines “cost of the work” decides this, and definitions vary — the split below is common, not universal.

Normally inside the markup (so do not also bill them as line items): your estimating and office time writing the change, the PM’s and office staff’s time, your office rent and software, your trucks and general overhead, and your profit.

Normally cost, not markup (so they belong in the base the markup is applied to):

• Labor burden. Payroll taxes, workers’ comp, insurance on the wage, union fringes, paid time off. This is cost, not overhead, and pricing changed work off a bare wage rate is the single most common underbill in the trade. If you have not built that number properly, start with your labor burden rate.
• Equipment brought for the changed work, at a defensible rate.
• Material, including freight, and small tools and consumables if your burden does not already include them — one or the other, never both.
• Field supervision attributable to the change. Often disputed. A foreman who spent two days on the extra is a cost; a general superintendent spread across the job usually is not.
• Bond and insurance on the added contract value. Some contracts allow these on top of the O&P cap because the bond premium scales with contract value. Check; if yours allows it, bill it, because nobody will add it for you.

The rule underneath all of it: you may not charge for the same thing twice. If your burden figure already includes small tools, you cannot bill small tools separately. If your overhead percentage already covers the PM, you cannot add PM hours as a cost line. A reviewer taking your change order apart is looking for exactly that, and finding one instance of it costs you credibility on every other line.

Stacking, and the rules about it

Three conventions are common on commercial work, though your contract, not the convention, governs:

• No markup on markup. You mark up your lower-tier sub’s cost, not their marked-up price twice over. Your sub quotes you $20,000 including their own markup; you add your (usually smaller) percentage to that $20,000 and that is the end of it.
• Lower-tier sub work usually carries a reduced percentage than work you self-perform, because you are coordinating it rather than doing it. A lower figure on sub work than on your own is a shape you will often see; the exact numbers are whatever your contract says.
• Material-only changes sometimes carry a reduced percentage too. Less common, but if it is in your contract it applies even when the change is a nuisance to administer.

And one convention that is not a convention: a credit change order is not the mirror image of an add. When scope comes out, GCs often expect the credit to come back with your markup removed, which means you lose the overhead you had already committed to that work. If your contract is silent, that is worth negotiating at buyout rather than arguing about per change.

What markup does not pay for

This is the heart of it. Markup is a percentage on the cost of the changed work. It is not compensation for what the change did to the rest of your job.

Those are separate asks, and they need their own line items with their own backup:

• Extended duration. Your foreman and your general conditions on site for three extra weeks.
• Inefficiency and stacking. Your crew working around another trade that should have been gone, at a lower production rate than you bid.
• Remobilization. Coming back to an area you had finished and demobilized from.
• Out-of-sequence work and overtime driven by the change rather than by you.
• Escalation on material you now have to buy later than you planned to.

Bundling any of these into “and we added fifteen percent” means you were never paid for them. They each need a date, a quantity and a cost, which means they need to be captured in the field while they are happening — a point in favor of logging the condition the day it appears instead of reconstructing it in month four. Change event versus change order is about exactly that split.

A worked example, with invented numbers

A change order for added conduit and devices. The contract caps overhead at 10% and profit at 5% on self-performed work, and allows 5% on lower-tier sub work.

Line	Amount
Labor, 96 hours at a $62 burdened rate	$5,952
Material, including freight	$3,400
Equipment, one lift for four days	$1,100
Lower-tier sub (core drilling), their quote	$2,500
Self-performed cost subtotal	$10,452
Overhead at 10%	$1,045
Profit at 5%	$523
Markup on sub work at 5%	$125
Change order total	$14,645

Two things to notice. The labor line is burdened, not a bare wage — at a $41 bare rate the same hours would have billed $3,936 and the whole change order would have come in about $2,300 light, which is more than the entire profit line. And the realized margin here is about 11.6% of the $14,645 billed, not 15%, because markup is applied to cost — and the sub’s $2,500 carries a lower percentage, which pulls the blended figure down further.

The two-week schedule impact this change caused is not in this table. It is a separate request, with its own backup.

Have the markup conversation at buyout

The worst time to discover your cap is while a GC’s PM is pushing back on a change order you need paid this month. The buyout meeting is the time, and three asks are reasonable and usually easier to win then than later: that bond and insurance ride on top of the cap, that markup on lower-tier subs be stated explicitly rather than assumed, and that credits return without your overhead stripped. Each is much harder to win once a change is already in dispute.

How SubMark handles it

SubMark does not pick your percentage — your contract does, and no software should pretend otherwise. What SubMark does is make sure the cost you apply it to is real and that the approved change does not vanish from your billing.

• The field opens a change event the day the condition appears: what happened, photos and, with phase tracking on, which phase it hit. A short entry from a foreman, and it is the only part nobody can reconstruct later.
• The office prices the request from that event, so labor, material and your markup sit on top of facts with a date attached rather than on a memory.
• Markup is one percentage per change order, applied to the labor and material lines, with an optional sales tax rate on material that drops off on a job marked tax-exempt. Separate overhead and profit percentages, or a lower rate on lower-tier sub work, are worked out by hand and entered as that one figure.
• Approved change orders are added to the schedule of values automatically when the job has one, as their own numbered lines, which is what keeps changed work billed separately from base contract work.
• Job costing counts the cost side against your own budget lines at the rate each hour was logged at, with open purchase orders shown as committed material cost. Giving each approved change its own code in your own cost code list (SubMark has no cost codes) — see cost code structure — is what lets you check afterwards whether the markup you were allowed actually covered what the work cost.
• Field users are free and unlimited, so the foreman who logs the event never needs a seat.

Our pricing is one company subscription that includes three office users, plus a per-seat price for each one after that, with a 14-day trial and no card.

Do this this week

1. Pull the markup clause for your three largest open jobs and write the figures on each job’s budget sheet.
2. Check whether bond and insurance are allowed on top of the cap on each one.
3. Confirm the labor rate your change orders are priced off is burdened, and fix it today if it is not.
4. Separate impact from markup on the next change you write: markup on the changed work, a second request with its own backup for what the change did to the rest of the job.
5. Put markup terms into your standard quote language, so the next contract that is silent defaults to yours.