How do I handle change orders in my accounting?
Change orders need to be recorded in your accounting system as soon as they’re approved. Waiting until the job is done or until you send the final invoice creates confusion and makes it impossible to track whether change orders are actually profitable.
Start with the documentation. Before anything hits your books, the change order should be signed by the client. This sounds obvious but contractors often start the extra work before getting approval in writing, then struggle to collect. From an accounting standpoint, you shouldn’t recognize revenue you can’t prove the customer agreed to.
In QuickBooks or whatever accounting software you use, handle change orders by updating the job estimate and creating a separate invoice or line item for the additional work. The goal is to see the original contract amount versus the total including change orders. Some contractors create change orders as entirely separate jobs linked to the main project. Others add them as additional line items on the same job. Either works as long as you can pull reports showing change order revenue separately.
The revenue side is straightforward. The trickier part is tracking the costs. Every change order should have associated costs recorded against it. The materials, labor hours, and subcontractor costs for that additional scope need to be coded to the change order, not just dumped into the overall job costs. Without this, you have no idea if your $5,000 change order actually cost you $4,000 in labor and materials or $6,000. This is where proper construction accounting setup pays off.
For progress billing situations, change orders affect your percentage-of-completion calculations. If you billed based on a $100,000 contract and you’re at 50% complete, adding a $20,000 change order changes the math. Your new contract value is $120,000, and your completion percentage shifts. This matters for revenue recognition and for understanding where you actually stand on the job.
Set up your chart of accounts and job costing structure to distinguish change order activity. At minimum, you want to see original contract revenue, change order revenue, original job costs, and change order costs. This breakdown tells you whether you’re pricing change orders profitably or subsidizing them from your original bid.
Many contractors discover they’re losing money on change orders because they mark them up the same as original work but don’t account for the disruption costs. Stopping scheduled work, remobilizing crews, reordering materials in small quantities. These inefficiencies eat into margins. Tracking change orders separately in your accounting reveals this pattern.
If change orders are a regular part of your work, consider them a separate revenue stream worth analyzing. Some contractors make better margins on change orders than original contracts because clients have less leverage once work is underway. Others consistently lose money because they don’t price the disruption. You won’t know which camp you’re in without proper accounting.
The accounting treatment also affects your tax situation. Change orders completed by year-end are income, even if you haven’t collected yet. Unsigned change orders where work is complete but approval is pending get more complicated. Our Nampa bookkeeping services team can help you set up job costing that tracks change orders correctly from the start so you have clean numbers for tax time and real insight into which jobs are making you money.
The Treasure Valley's Tax and Accounting Team
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