What is a change order?

Definition

A change order is the signed paper that revises an existing job after both sides already have a contract. On the books, this is not a journal by itself, but the amendment that changes what will later be billed and earned.

A remodeler who adds a pantry after the kitchen is already signed needs that amendment before the extra work is treated as part of the job. Without the signature, the extra work is a request, not an agreed change to the contract.

It does not hit the Income Statement the day it is signed. Revenue waits until the added work is earned, and cash waits until that work is billed and collected.

Stay with the signed amendment when you read it. The later invoice, the job-cost entry, and the earned-revenue math each belong on other pages.

Where it shows up

Balance sheet: Related to nothing sitting as an account until billed or earned.

P&L: Related to extra revenue only as the added work is earned.

Cash flow: Related to nothing until the added work bills and collects.

See also: Contract · Statement Of Work · Job Costing

When you look at your Income Statement, a change order does not print as its own line. Extra revenue shows up only as the added pantry work is earned, the same way the original kitchen is earned.

The Balance Sheet does not hold a change-order account. Until the extra work is billed or earned, there is no new receivable and no new liability from the signature alone.

On the Statement of Cash Flows, cash does not move at signing. Cash moves when the added work is invoiced and the customer pays.

How it works

A typical path starts with a job already under contract. The owner asks for something that was not in the original scope, such as a pantry beside the kitchen.

The remodeler prices the add, writes the new scope and the new price, and both sides sign. The job's contract value becomes the original amount plus this amendment.

How a change order usually works:

• Start from a job already under contract
• Price the add, write new scope and price, both sides sign
• Update job total, cost codes, and billing schedule to the amended amount
• Bill and earn against the amended contract, not the original alone
• Without a signature, the extra work stays outside the job

Stay on that signed paper. Do not treat a text message, a quote, or a crew already cutting lumber as the amendment.

After it is signed, job records should show the new total. Cost codes for the pantry, the revised billing schedule, and the revised earned-revenue base all follow that new number.

If the extra work is billed in stages, those later invoices follow the amended contract, not the original one. If earned revenue is measured against the job total, that total is now the amended amount.

If the owner never signs, the extra work is still outside the job. Putting pantry cost on the kitchen without the amendment mixes two different agreements.

Do not post a journal that says "change order." The journal comes later, when the added work is billed or when it is earned.

Example

North Pine Kitchens has a signed $50,000 kitchen remodel. After cabinets are ordered, the owner asks to add a pantry for $4,000.

Both sides sign a change order for that pantry. The job's contract value is now $54,000, which is the original $50,000 plus the $4,000 amendment.

Nothing hits cash, receivables, or revenue on signing day. The $4,000 is agreed work, not a bill and not earned performance yet.

When the pantry is built and billed, the remodeler invoices against the amended $54,000 job. Cost for the pantry posts to that same job, not to a side note on the original kitchen.

If the owner had only said yes in the hallway, the $4,000 would not be on the contract. The crew could still build the pantry, but the books would have no signed price to bill against.

Common mix-ups

A change order is not the original contract. The contract is the first binding agreement; this page is the signed revision that changes that agreement.

A change order is not a quote. A quote is a priced proposal before anyone has agreed; this page is an amendment after the job is already signed.

A change order is not an invoice. The amendment changes what may be billed; the invoice is the later document that actually bills the added work.

Related terms

• Contract: The binding agreement that sets what will be delivered and what will be paid.
• Statement Of Work: The document describing the scope, deliverables, and price of an engagement.
• Progress Billing: Invoicing a customer in stages as work is completed.
• Job Costing: Tracking revenue and cost for each individual job, project, or order.
• Backlog: Signed work that has not yet been delivered or recognized as revenue.
• Quote: A priced proposal issued to a customer before an order is placed.
• Percentage Of Completion: Recognizing revenue in proportion to how much of a job is finished.
• Bookings: The contract value signed in a period, whether or not it has been billed.