Change Order Accounting Software: What It Should Handle

A signed change order does more than add a line to a log. It changes what the job is worth, what it is budgeted to cost, and what you can bill.

Whether your accounting system carries that change through, or leaves someone to update it later, decides if your job numbers can be trusted. Here is what change order accounting software should do, and how to tell whether yours does it.

A Signed Change Order is an Accounting Event

When a change is approved, three numbers move at once: the contract value, the cost budget, and the amount you are entitled to bill. If the change lives in an email thread, a binder, or a separate log, none of those numbers move until someone remembers to update them.

That gap fails in two predictable ways. Costs for the extra work post to the job before the contract value and budget are revised, so the job looks like it is losing money. Or the approved change never reaches an invoice, and you carry work you have earned but not collected.

Three Kinds of Change and How Each is Treated

Not every change is ready to count. Your system should be able to tell these apart:

• Approved: scope and price are agreed in writing. It belongs in the contract value, the budget, and billing.
• Unpriced: the work has been agreed or directed, but the price is not settled. Costs are building up with no contract value behind them yet.
• Unapproved: the change has been requested or is expected, but nothing is signed. It is not part of the contract.

Keep approved changes apart from pending ones in your reports. Approved changes drive the numbers. Pending ones should stay visible as a separate view, so your project managers and your lender can see the exposure without it being mixed into the contract value.

How to book unpriced and unapproved changes depends on your reporting framework and how likely you are to recover the costs. That is a judgment call, so settle the policy with your auditor before the next job is under way.

What Your Accounting System Should Do When a Change is Approved

Approval should set off the same four steps every time:

1. Revise the contract value, with the original amount still on record.
2. Update the cost budget, including any subcontract changes, so budget versus actual compares against the right number.
3. Make the change billable, so it reaches the next invoice without being re-entered.
4. Keep the original budget and an approval trail showing who requested the change, who signed it, and when.

If any step means re-keying the change into a second place, that is where changes go missing. This is also why change orders are one of the inputs to accurate job costing: a budget that never reflects approved changes can't tell you what a job actually made.

How Change Orders Flow Into the WIP Report

A work-in-progress report starts from the contract value, which is the original contract plus approved changes. If costs hit the job before that value and the cost budget are updated, the report shows a false underbilling and a distorted percent complete.

Your bank or bonding company reads that report. A job that looks weaker than it is can cost you credit or bonding capacity, and the person who has to explain it is usually the same person rebuilding the report by hand each month.

Change Directives Under CCDC 2

Many Canadian contracts use CCDC 2, and it adds a wrinkle that most accounting content ignores. When the parties can't agree on a price but the owner needs the work to proceed, the owner can issue a change directive. The contractor proceeds, and the price is settled later.

Law firm commentary from WeirFoulds notes that payment for the extra work, and any adjustment to the contract time, are addressed only once a change order is issued, which can come late in the project. BLG reports that the 2020 edition limits the costs charged against a directive to those that contribute directly to the change.

For your accounting, directed work is unpriced work. Costs are accumulating before there is a contract value to match them. Track them from the first day against their own cost codes, with time and material records, so you can support the number when the price is settled. Check your own contract for its terms, since not every project uses CCDC 2.

How Sage 100 Contractor and Sage Intacct Construction Handle Change Orders

Sage's help documentation describes how each product records them.

In Sage 100 Contractor, prime changes alter the job proposal, while budget and subcontract changes are tracked separately. Approved changes show up in the contract and job cost reports while the original budget remains unchanged, and approved prime changes can be used to create receivable invoices. It can also alert you to unbilled change orders.

In Sage Intacct Construction, change management records planned and unexpected changes and shows how they affect estimates and billing across the life of the project. Change requests can be grouped into a project change order that summarizes their total price and costs, which simplifies billing.

Which one fits depends on the size and complexity of your company. Our guide on when to upgrade in construction covers how to think about that.

Is It the Software or the Setup?

Before you assume you need new software, look at how change orders move through your business today:

• The change log is a spreadsheet kept outside your accounting system.
• Approved changes are billed late, or occasionally never.
• The WIP report is built by hand every month.
• Nobody can quickly say which changes are approved and which are still pending.

If your system has change order functions that nobody uses, fix the setup first. If it can't tie an approved change to the budget and to billing, no setup will fix that. As I often say, "Software is only 50% of the solution." The rest is knowing which problem you actually have.

What This Looks Like in Practice

Ward Bros. Construction moved to Sage 100 Contractor with Sage Service Operations and Estimating. As the case study describes, the team spent far less time tracking subcontractor invoices and multiple change orders, and reports on productivity, WIP, and profit and loss by job came quickly.

Darren Boras, CFO and Owner, said, "We are finally able to hold the superintendents and project managers accountable for their projects. The information is available to them daily on what is happening with each project."

Find Out Where Your Change Orders Stand

If any of this sounds familiar, the next step isn't picking software. It's finding out whether the problem is the system or the setup, and what a fix would involve.

Asyma's Financial System Audit reviews your current software and processes, then delivers a needs analysis, a cost/benefit analysis, and a project proposal. Sometimes it confirms a change is needed, and sometimes it shows you that smaller fixes will hold for now. It is backed by the same 100% satisfaction guarantee behind everything we do. Get started with a Financial System Audit.