How should I handle change orders in my construction job costing system?
Every change order should be treated as an amendment to the original contract. When a client adds scope or changes direction mid-project, that change needs to flow through your accounting system the same way the original contract did. That means updating both the total contract value and the estimated cost to complete in your construction job costing setup.
Start by creating a written change order document that spells out the additional or modified scope, the price adjustment, and the revised timeline. Get it signed before you start the work. This protects you legally and gives your bookkeeper the documentation needed to update the books accurately. Verbal agreements lead to disputes, and disputes lead to unpaid invoices.
In your accounting software, adjust the job’s total contract value to reflect the approved change order amount. If the original contract was $180,000 and the change order adds $22,000, your new contract value is $202,000. Then update the estimated costs for that job to include the additional labor, materials, or subcontractor expenses the change order requires. Both numbers feed into your WIP (Work in Progress) schedule, and if either one is wrong, your percentage of completion and revenue recognition will be off.
The critical rule is to never recognize revenue on an unapproved change order. If you’re doing the work before the client signs off, track those costs in a separate line or sub-job so they don’t inflate your recognized revenue. You can track unapproved change orders as pending items in your WIP schedule, but they should not be included in your revenue calculations until the client formally approves them. Contractors who skip this step end up with WIP reports that overstate profitability and create problems when overbillings or underbillings get reconciled at the end of the project.
Once a change order is approved, merge those costs and revenue into the main job. Review the revised budget against actual spending to make sure margins still hold. Sometimes the change order price covers the added scope nicely. Other times, the real cost of the change is higher than expected and the margin shrinks. You won’t know unless the numbers are tracked properly.
If you’re running multiple projects with frequent change orders, a monthly review of your WIP schedule becomes essential. Each job should show the original contract value, approved change orders, total revised contract value, estimated costs, costs to date, and the resulting over or underbilling position. This is the kind of financial visibility that helps you make real decisions about which jobs are profitable and which ones are eating into your margins.
Most Phoenix contractors who struggle with change order tracking aren’t doing anything wrong on the job site. The breakdown happens in the back office. Costs get lumped into the original job without updating the contract value. Unapproved work gets billed before the paperwork is signed. The WIP schedule goes months without being updated. By the time someone looks at the numbers, they don’t reflect reality.
Good small business bookkeeping services for construction companies should include a process for handling change orders as they happen, not cleaning them up after the project closes out. The sooner the books reflect reality, the better your decisions will be on current and future jobs.
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