Blog Article

Change Order Management: How to Stop Extra Work From Eating Your Profit

The extra work is rarely one big decision. It is a faucet here, an upgrade there, a favor to keep the client happy. Each one is small, and together they quietly absorb the margin you bid the job on.

Hello, welcome everyone. Thank you for joining us today. We are going to deep dive into change orders. Let's talk about change orders and maybe what some people have experienced. You have a client, you have a large job, you're working on their home or their office building, doing a big project, and your client comes in and says, “Hey, by the way, I just have this one minor thing I'd love for you to look at.” And no problem, you go ahead and help them out because you want to keep that client happy, right? So now months go by and you realize that you just ate that profit. Why did you eat that profit? Because you paid for all of the expenses that incurred with it, but you didn't actually change the scope of work and their invoicing. So this constantly happens with construction companies, and things just add up on the job regularly, and verbal agreements fall through the cracks, so they aren't ever gone through and revenue is just leaking quickly. So today we're going to change that. We're going to look at really figuring out how to master those change orders. What are the steps that you can look at to make sure that you don't lose more money than you want to? So let's bulletproof those standards and dive right in.

So, change orders, eliminating revenue leakage and protecting job margins for contractors over a million dollars. The first thing is basically any unbilled extra work. That is why we have change orders. It's materials that have been upgraded, or random jobs and tweaking of maybe the build site, just quickly doing them because perhaps you've been on this job for six months and you just want to get it finished. Or the client comes out and is looking at the progression every single week and over time says, oh, what about this? What about that? These verbal agreements are really what erodes our profit margin on each project, because a lot of times it doesn't get from the person who's talking about it over to the accounting team to ensure that our estimations or scope of work is in fact updated, so that we can go through the proper forms of ensuring that it's all invoiced out. Because although a client may verbally agree to it, until it's actually written, there is room for he-said-she-said, and we really want to eliminate all of that. It also delays invoicing, so all these extra costs are hopping in on your regular day-to-day business, and the accounting team may not really understand that this is something outside of the scope, and perhaps think it's just part of the job. So when we get all of that billing finally invoiced out and we deep dive into things, the client says, “Whoa, whoa, whoa. This is not what we talked about, and we're not paying for that.” That is worst case scenario, and we want to make sure that everything is upfront and clear, and we can move forward with what the scope of work actually is.

So how can we go about ensuring that this is taken into account for all of our invoicing, all of these little tweaks on the projects, a marble upgrade from a laminate or whatever it might be? We want to make sure that those are taken care of immediately on site, and that we capture photos, describe what was completed, and any site conditions before starting it. That way we have documentation to say, this is the thing that was requested and we want to move forward with it. Then we want to make sure that we have all of the pricing in order for the accounting team or your sales team to write up that new change order from the original estimation and project scope of work, so that we can get it out to the client and have that written client approval. So they're seeing it again and saying, oh yes, I do approve of it, no problem. Because as we know, there's a lot of back and forth that may come up with your pricing, and they may want this change, but then they see the dollar price of it and may renegotiate back down to what they originally did. The estimation and change orders really just keep it very clear for every party what each person is in control of. There's better clarity for each party to understand this is exactly what I'm going to be paying for, and this is exactly what I'm going to be getting. And then the fourth one is just making sure that you're updating all of your accounting records or sales software. There's many out there, but just ensuring that the whole spectrum of people, not just the people on the job site, are getting information on how to change it, and that all of it is tracked so that we can stay on point with how the job is progressing.

Scope creep and approved change orders. These are those minor adjustments that are happening, and they can really erode the profit margin that you have on each job. The impact is really like the quick favors. Hey, I need you to change this faucet to this upgraded two-handle faucet. I'm not a contractor, so just throwing that out there. A lot of times it just ends up being absorbed by the contractor themselves, with these extra expenses that were never invoiced out. So it's really ensuring that there's that formal contract amendment that reflects this extended scope of work, so that you can efficiently go through and everyone understands what is ahead of them. Profit margins: a lot of times we see that you can lose up to 10 to 15% of this extra work, and whether small businesses or large ones, this can erode that profit margin pretty quickly. We're already on tight budgets, everyone, especially with rising supply costs and rising costs for your labor. We are always wanting to adjust and make sure that things are taken care of, because the worst thing is to basically be paying to be on the job. That doesn't set you up for doing well on the next job and being able to give the best value for those people. So make sure you're tracking all of your hours, making sure that those on the job are doing what they should, and that you have a detail of their planned day. And then, did you do any extra work, and are you making sure you're billing those out? It really protects your crew and your business and maintains that accuracy throughout. And then the next thing is connecting field logs to financials. There are a multitude of software out there to help those on the job versus those in administration and in the office. Choosing a software that can sync automatically is a great way to go. Paper and email can get lost. Although that can be a good workaround, having some sort of financial software, and we love QuickBooks, that can work within there will help keep everything up to date and sent out on time. So that is it for us. If this has helped you figure out how to tighten up your change orders, I love that. We hope that you can join us next time. If you want to hit subscribe on our channel, make sure you're notified for the next item that we go through. We are really looking at our construction companies earning around $500,000 to $10 million and trying to dial in their processes so that they can feel secure and build a better business, because we really feel that when you know your numbers, you can own your future. I'm going to leave that today and we'll see you on the next.

A change order is written, priced, and approved documentation of work that goes beyond a job's original scope. When contractors skip it and just do the favor to keep a client happy, they pay for the materials and labor but never invoice for it, so the profit quietly disappears. A simple change order process closes that leak.

Why does unbilled extra work cost you so much?

Because you pay for it and never charge for it. Picture a large project on a client's home or office building. Partway through, they say, “by the way, I just have this one minor thing I'd love for you to look at.” You say yes, because you want to keep them happy. Months go by, and you realize you ate the profit. The expenses hit your books, but the scope of work and the invoicing never changed.

This happens constantly in construction. Extra work adds up on the job, verbal agreements fall through the cracks, and revenue leaks quickly.

The deeper problem is a handoff gap. The conversation happens on site, but it never reaches the accounting team, so the estimate and scope never get updated and the work never gets billed. Until it is in writing, you are also exposed to he-said-she-said. And when you finally do invoice it, all at once, the client can push back: this is not what we talked about, and we are not paying for that. That is the worst-case scenario, and clear paperwork up front is what prevents it.

How much does scope creep actually erode?

You can lose 10 to 15% of that extra work when it goes unbilled. Those minor adjustments, the classic “change this faucet to the upgraded two-handle one,” get absorbed by the contractor and never invoiced.

On already-tight budgets, with supply and labor costs rising, that adds up fast. The worst outcome is effectively paying to be on the job, which leaves nothing to carry into the next one or to deliver real value for the next client. Scope creep is one of the same leaks that quietly collapses your bid margin, which we cover in estimating vs. actuals.

What are the steps to manage a change order?

Capture it on site, price it, get written approval, and update your records. Four steps.

1. Document it on site, immediately

The moment extra work comes up, capture photos, describe what was completed, and note the site conditions before you start. That documentation is your proof that the work was requested and agreed to.

2. Price it and write the change order

Get the pricing in order so your accounting or sales team can write up the change order against the original estimate and scope of work. This is what turns a hallway conversation into a billable line item.

3. Get written client approval

Send it to the client and get approval in writing. Verbal is not enough. Expect some back and forth, because once they see the dollar figure they may renegotiate or drop the request entirely. That is fine, and it is the point. A written change order gives every party clarity on exactly what is being paid for and exactly what is being delivered.

4. Update your accounting and job records

Update your accounting records and sales software so the whole team, not just the crew on site, has the change, and so it is tracked against the job's progress. This is also what keeps your job costing accurate, since an untracked change quietly distorts the numbers for that job.

How do you keep the field and the office in sync?

Connect your field logs to your financials with software that syncs automatically. The handoff gap between the job site and the office is the root cause of most missed change orders, so the fix is a system rather than good intentions.

Paper and email work as a stopgap, but they get lost. Financial software that ties the field to the office, and QuickBooks is the one we prefer, keeps everything current and invoiced on time. Alongside it, track your crew's hours and their planned day so any extra work is visible and gets billed. That protects both your crew and your business, and it keeps the whole job accurate.

Key takeaways

A change order is written, priced, approved documentation of work beyond the original scope.
Skip it and you pay for the work but never bill it, so the profit disappears.
Scope creep can cost 10 to 15% of the extra work when it goes uninvoiced.
Four steps: document on site with photos, price and write it up, get written approval, update your records.
Verbal agreements expose you to disputes. Written approval protects both sides.
Sync field logs to your accounting software so nothing falls through the handoff between crew and office.

Frequently asked questions

What is a change order in construction?

It is written documentation of work beyond the original scope of a job, priced and approved by the client before it is billed. It amends the original estimate and scope so the extra work can be invoiced properly.

Why do change orders get missed?

Because the request happens on site as a quick verbal agreement and never reaches the accounting team. The scope and estimate do not get updated, so the work gets done but never invoiced.

How much profit does scope creep cost?

Up to 10 to 15% of the extra work when it is absorbed instead of billed. On tight margins with rising material and labor costs, that erodes profit quickly.

Is a verbal agreement enough for a change order?

No. Until it is in writing you are exposed to disputes, and the client can refuse to pay when the invoice arrives. Written approval protects both parties and makes the extra work billable.

How do I stop change orders from slipping through the cracks?

Build a repeatable process: document on site, price and write up the order, get written approval, and update your records. Then connect your field logs to accounting software that syncs automatically so nothing is lost between the job site and the office.

Want help plugging the leak?

Tightening up change orders and making sure every bit of scope gets billed is part of the ongoing work we do in our Virtual CFO service and accounting for contractors. We work with construction companies doing $500,000 to $10 million who want to dial in their processes and feel secure. Email help@allaccountingllc.com or reach out to All Accounting.

Know your numbers. Own your future.