How do contractors handle change orders in their books?

A change order changes the scope of a project, and your books need to reflect that. When the original contract price shifts, everything downstream in your financials shifts too. Getting this wrong leads to inaccurate job costing, overstated or understated revenue, and financial statements that don’t reflect reality.

When a change order is formally approved and signed, it increases the total contract value. That updated value needs to flow into your work-in-progress (WIP) schedule right away. This is critical because your percent-complete calculation depends on total contract price. If you’ve spent $80,000 on a $200,000 contract, you’re 40% complete. But if a $50,000 change order brings the contract to $250,000 and you don’t update the books, your percent-complete drops to 32% and your recognized revenue is off. Every construction business using percentage-of-completion accounting needs to keep the WIP schedule current with approved changes.

The right process is straightforward. Document the scope change, price it, get written approval from the client, then update the contract value in your accounting system. Costs already incurred for that additional work get matched against the new revenue. Billings get adjusted to reflect the higher contract amount. Everything stays in sync.

Unapproved change orders are where contractors get into trouble. This is work you’ve done or started in anticipation of the client eventually signing off. Maybe the project manager told you to go ahead verbally, or maybe the work was urgent and couldn’t wait for paperwork. Either way, you’ve spent real money on labor and materials without a signed approval to collect against.

You can’t record unapproved change order revenue as if the contract has been modified. Instead, the costs you’ve incurred should be booked as unbilled receivables or shown as costs in excess of billings on your balance sheet. And if there’s any uncertainty about whether the client will actually approve and pay, you need to set up a reserve against that amount. Carrying $75,000 in unapproved change orders at full value when half of them might get rejected is overstating your assets and hiding a real problem.

This is one of the most common cash flow killers for contractors. The profit and loss looks fine because the costs are sitting on the balance sheet as receivables. But the cash never shows up because the change orders never get approved, or they get approved at a lower amount, or the client disputes the work entirely. Meanwhile, you’ve already paid your crew and your suppliers.

The fix is operational as much as it is financial. Get change orders documented, priced, and formally approved before work begins. Every time you proceed on a handshake, you’re funding work out of your own pocket with no guarantee of recovery. As bookkeepers in Fairfax working with contractors across the DMV, we see businesses carrying significant unapproved change order balances and wondering why their bank account doesn’t match their financial statements. The answer is almost always the same: the books show revenue that hasn’t been collected because the paperwork was never signed.

Review your WIP schedule monthly and flag any unapproved change orders that are aging. If something has been pending approval for 60 or 90 days, the odds of full recovery are dropping. Adjust your reserves accordingly and have a direct conversation with the client. Clean books depend on honest assessments of what you’re actually going to collect, not what you hope to collect.