Welcome back! As you all know, life throws you curve balls. It’s not any different in the construction world. Projects rarely go exactly as planned. Designs shift, clients request upgrades, or unexpected issues pop up once work begins. That’s where construction accounting becomes absolutely critical; especially when it comes to handling change orders and keeping your books accurate.
A change order may sound like just another piece of paperwork, but it has real financial consequences for your business if it’s not managed properly. Whether it’s additional labor, new materials, or extended timelines, change orders impact your revenue, expenses, and ultimately your bottom line. Keeping track of these adjustments with accurate bookkeeping ensures you stay profitable, avoid disputes, and maintain financial clarity.
Why Change Orders Can Make or Break Your Numbers
In construction, cash flow is king. A missed or poorly documented change order can throw your entire budget off track. Not only does it affect your project profitability, but it can also create confusion when it’s time to invoice clients or prepare for tax season.
Here are 4 reasons why handling change orders properly, matters:
- Profitability tracking: Without recording adjustments, you won’t know the true profit margin of a job.
- Transparency: Clients appreciate clarity when they see exactly what’s been added or modified.
- Cash flow stability: Documented change orders make sure you get paid for the extra work you perform.
- Audit readiness: Should questions ever arise, you’ll have clear records to back up your numbers.
When it comes to construction accounting, proper change order management means fewer surprises and more control over your financial health. For more on the ripple effect that poor cash flow management can cause, check out this article.
Best Practices for Managing Change Orders
So, how do you make sure your books stay clean and accurate while navigating the chaos of mid-project changes? Here are 5 of the best practices you can start implementing:
- Put It in Writing
No matter how small, every change should be documented. A verbal “go-ahead” from a client isn’t enough. Written approvals protect your business and create a paper trail for your accounting records.
- Update Budgets Immediately
As soon as a change order is signed, update your project budget. Don’t wait until month-end or year-end to reconcile. Keeping your books accurate in real time helps you stay on top of costs.
- Separate Costs by Project
In construction accounting, separating each job and its related change orders is critical. By creating cost codes or specific line items for change orders, you’ll see exactly how each adjustment affects profitability.
- Communicate With Your Team
Your bookkeeper, project managers, and field crew should all be in sync. When everyone knows a change order has been approved, there’s less chance of miscommunication and untracked expenses.
- Use the Right Tools
Accounting software tailored for construction can streamline the process. Many platforms allow you to attach change orders directly to invoices and budgets, keeping everything organized and accessible. Having a strong system of processes ensures tasks are done on time and holds the team accountable.
Avoiding Common Pitfalls
Even with the best intentions, change orders can get messy. Some common pitfalls include:
- Delays in approval: Work starts before the change order is signed, leaving you at risk of not getting paid.
- Inaccurate coding: Change order expenses lumped in with regular job costs make profitability harder to track.
- Forgetting indirect costs: Extra labor hours or equipment wear and tear often get overlooked.
By weaving change orders directly into your construction accounting process, you’ll catch these issues early and keep your records airtight.
The Long-Term Benefits of Accurate Bookkeeping
Managing change orders isn’t just about the project at hand; it sets you up for success in the future. Accurate bookkeeping gives you:
- Better forecasting: Historical data from past jobs helps you price future projects more realistically.
- Stronger client relationships: Clear, consistent documentation builds trust with your clients.
- Smoother audits and tax prep: With organized books, you’ll save time and reduce stress when tax season rolls around.
When change orders are handled properly, they become a strategic advantage instead of a headache.
In Closing…
Change is inevitable – but financial confusion doesn’t have to be. By building strong change order practices into your construction accounting process, you’ll keep your books accurate, your projects profitable, and your clients happy.
Please give us a call or schedule a free discovery call.
