How do I account for change orders and contract modifications?

The most important rule is keeping change orders separate from the original contract in your accounting system. Every change order should be its own line item against the project so you can see what the original scope actually cost versus what additional work added. Without that separation, your job profitability numbers are meaningless because you can’t tell whether margin changes came from cost overruns or from new scope that was priced and approved.

When a change order gets approved, update the project budget immediately. Add the new revenue and the estimated costs for labor, materials, and subcontractors tied to that change order. This revised total becomes your new baseline for tracking the job. If you just lump change order revenue into the original contract total without adjusting the cost side, your job costing reports stop telling you anything useful.

In QuickBooks or whatever software you use, create a sub-item or category under the project for each change order. Many contractors number them (CO-001, CO-002) to match the signed documents. When you invoice for change order work, it shows up separately on the customer’s bill and in your revenue tracking. When you incur costs related to that work, code them to the change order category rather than the original scope.

Documentation is where most contractors fall short. Every change order needs a signed agreement before the work starts. That agreement should include the scope of additional work, the price, and the timeline impact. Without a signature, you have no legal basis to collect and no accounting basis to book the revenue. Keep signed documents linked to the corresponding entries in your books so there’s a clear trail.

Don’t wait until the project wraps up to record change orders. Enter them as they’re approved. This gives you a real-time view of total contract value and helps with cash flow planning. If you have $40,000 in approved change orders that haven’t been invoiced yet, that’s money sitting on the table that you should be billing for.

For contract modifications that change the price of existing scope rather than adding new work, adjust the original contract line items and document the reason. A negotiated discount or a material substitution that lowers the price is fundamentally different from additional scope. Tracking these separately helps you understand your true estimating accuracy over time.

The goal is being able to answer two questions at any point during a project. First, how is the original contract performing against the original estimate? Second, how are the change orders performing against their individual budgets? If you can answer both questions with confidence, you have real visibility into where your money is going and whether the project is actually profitable.

If your current system makes this difficult or you’re not sure your books reflect what’s really happening on your projects, working with Tampa Bay bookkeeping professionals who understand construction accounting can help you get the structure right from the start.