Updated: May 19
Are you a construction business owner looking to increase profitability and ensure accurate financial management? Then it's time to talk about change orders and their impact on your WIP schedule report.
Change order management may be the most important part of a construction company's ability to make money. A Work in Progress report (WIP report) is used to track how much money the project is making, but a change order is one of the things that may throw off how profitable it is.
Table of Content:
WIP Report: What Is a Change Order?
What exactly is a change order? It's an amendment to a construction contract that changes the contractor's scope of work, including cost and schedule changes.
As people's lives are always changing, so are change orders for contractors. As a contractor, it's crucial to track all change orders accurately so that you can correctly get paid for unpaid invoices.
How Many Types of Change Orders?
Change orders must be approved as quickly as possible to the date that they occur and not be left until the end of the contract. Because this is when the contractor has little influence and must negotiate the price after the work has been completed.
There are three main types of change orders:
Approved: approved in price and scope
Unpriced: may or may not be approved in scope
Unapproved: unapproved as to both price and scope
How Change Orders Will Impact the WIP Report?
1. Approved: Change orders that are approved are ones where both parties agree on the work to be done and how much it will cost. The Work in Progress report will be affected by a change to the contract price and total estimated costs to reflect the amounts approved by the customer.
2. Unpriced: The work in an unpriced change order is defined, but the price (i.e., the contract price adjustment) is negotiated afterward.
It is reasonable to assume that the contractor will be capable of turning unpriced change orders into priced and approved ones if the events required for recovery are likely to occur.
3. Unapproved: Unapproved change orders have not been approved for scope and price. This means that the contractor is unable to confirm unapproved change orders when they are improperly recorded.
Contractor Best Practice for Change Orders
These practices are fully provided by the Construction Financial Management Association:
Step 1: Obtain notices to proceed as evidence that work was instructed to be performed.
Step 2: Document all changes
Step 3: Maintain good backup and remember to segregate costs into appropriate cost codes
Step 4: Review the log regularly, and follow up promptly
Step 5: Keep change requests on the project team meeting agenda.
You should be aware of the change order requirements in the contract, as requests are time-sensitive. Since the contractor will often incur costs, it is important to request the change order so that payments will be received.
Real-Life Examples of Change Orders
Hidden issues, such as underground site conditions
Owner changes or modifications
4 Key Things to Remember for Better Change Order Controls
1. You (the contractor) need to implement controls for updating the budget for change orders
2. Change orders CANNOT BE BILLED UNTIL the change request is APPROVED
3. Must get change orders approved as quickly as possible
4. There is no leverage for the negotiation of change orders during the contract completion phase.
How a Bookkeeping Services Firm Can Improve Construction Accounting and Financial Management
Change orders are common in the construction industry, but they are hard to handle. A change order can affect project costs, scheduling, and materials. The contractors must keep accurate records of all change orders to make sure they are billed and paid correctly.
This is where a bookkeeping service firm can help!
CCA helps construction companies manage and track change orders. Our experts record, verify, and invoice any changes. This can save you time, effort, and, most importantly, client disputes.
With good control of change orders, you can be sure that your WIP schedules will always be accurate and up-to-date. No more complex and time-consuming WIP report preparation. Our staff will also help you create the most accurate WIP schedules so you can simply manage project expenses, and make profitable decisions.
As a contractor, it's important to track all changes accurately to ensure the current WIP report rewards profitability. But managing change orders can be a daunting task.
Don't let messy change orders impact your profits! Let CCA help you streamline your construction financial management.