Change Order Considerations

Published:

by Tim Ayler, CPA, Partner, Director of the Construction Services Group | Shaun King, Member of the Construction Services Group

Every day people make plans that don’t go exactly as planned. For those in the construction business, adjustments to plans aren’t always as simple as making a phone call or switching a schedule. Many times, for a contractor to get paid there needs to be a change order issued. As with any adjustment in plans, there are many items to consider.

Review the Fine Print:
Some construction contracts will require multiple steps to be performed to secure additional payment/time through a change order. Failing to meet the requirements of each step could lead to the change order being waived. We suggest contractors take the time to read all requirements listed in the contract for change orders. By doing so, contractors reduce the chance of the change order being waived due to a small technicality written in the original contract.

Verbal Agreement vs. Signed Change Order:
Far too often, required procedures for a change order are not followed while in the field. Contractors instead will accept a verbal agreement with the owner or general contractor to not only do the work, but also regarding how much it will cost. Unfortunately, when it comes time to be paid for the extra work performed, disagreements may arise, non-payment may occur, and sometimes messy litigation follows. We suggest that as soon as a contractor realizes additional work is required, the project manager present to the owner or general contractor a formal listing of estimated additional charges, along with a change order. The contractor should then wait, whenever possible, until the change order has been reviewed and signed before continuing with the additional work. While this may cause slight delays, it could save the company money and spare you from expensive and time-consuming disputes or lack of payment for work performed that was not approved.

Keep Your Accountant in the Loop:
Project managers should also be sure to communicate any change orders to their accounting department, whether approved or unapproved. This allows the accountants to accurately track the additional costs and profits on the project and properly classify the additional expenses for financial statement purposes. In most cases, expected profits on change orders can not be reported on the financial statements until the signed change order is received.

By thoroughly reviewing contracts, obtaining signed change orders, and communicating these changes to your accounting department, a project is more likely to run smoothly, be accurately reflected in the financial statements, be easier to collect on, and be profitable.