How do I handle change orders in my accounting?
Change orders need to be tracked separately from your original contract amount. When a client adds a feature or modifies the scope mid-project, that’s new work with new budget. Mixing it with original contract costs makes it impossible to see whether you estimated the job correctly or whether change orders saved your margin.
Create each change order as a distinct item in your job costing system. In QuickBooks, this might mean adding a sub-project or a separate class for each change order. The structure depends on your software and how many change orders you typically have per project. The goal is being able to pull a report showing original contract profit versus change order profit.
Document and get approval before starting the work. This isn’t just about protecting yourself legally. It’s about making sure the additional revenue actually gets recorded. A verbal “go ahead” from a client turns into a disputed invoice when they don’t remember agreeing to it. Written change order forms with signatures become billable line items that actually get paid.
Record the change order when it’s approved, not when the work is done or when you invoice it. You need to see committed revenue and committed costs as soon as the change order is signed. This keeps your work-in-progress reporting accurate. If you wait until the work is complete, you’re looking at outdated numbers when making decisions about the project.
Match costs to the correct change order. When you buy materials or pay labor for change order work, code those expenses to the change order specifically. This takes discipline but it’s the only way to know if that $8,000 change order you sold for $10,000 actually made money or if it ate into your original contract margin.
Track markup separately if your change order pricing differs from original contract pricing. Some contractors mark up change orders higher because they’re interruptions to planned work. Others mark them up less to maintain client relationships. Knowing your actual margin on change orders tells you whether your pricing strategy is working.
Review change order performance across jobs, not just within each project. If your change orders consistently lose money, your pricing formula is wrong. If they’re always more profitable than original contracts, you might be underpricing your bids and relying on scope changes to make margin. A San Diego construction bookkeeper can help you build reporting that shows exactly where your project profits come from.
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