CONSTRUCTION Accounting ARTICLE -
Housing Contractor Turns Extra Work Into Extra Pay
Target Audience: Construction Industry Professionals, General Contractors, Construction Accountants
Even with a relatively healthy roster of jobs, one midsize housing contractor was barely scraping by. Extra work and change orders had cropped up on several recent projects, and she kept running into disputes with owners over the costs. Tracking down invoices and other documentation was a hassle, too, and the contractor’s out-of-pocket expenses for the work were eating away at her bottom line.
Anxious to put the books in order, the contractor asked her construction business advisor for help establishing better procedures for documenting extra work and change orders.
Finding a better way
First, the advisor noticed some inconsistencies in the contractor’s project cost accounting system. She needed to establish uniform cost codes for project estimates and incurred job expenses so they’d be easier to compare.
She also needed to enhance her accounting system to break out all costs associated with extra work or change orders — including labor, equipment, materials and other expenses. Then the contractor would need to ensure that her staff used the system to track each expense for every project.
The advisor also suggested developing a standard set of forms for documenting extra work and change orders. Providing prompt documentation would go a long way toward heading off potential disputes.
Together, they created an order approval form that would require an owner’s signature and include details about the phone conversation, field directive or other information that led to the changed or extra work. A change order log, time cards that broke out hours spent on extra or changed work, and a form for recording additional use of equipment rounded out the new documentation procedures.
Doing due diligence
Performing the right research before and during construction would be important as well. It would not only make change orders more manageable, but also possibly reduce the number of changes during a job, the advisor explained. For example, some project owners — particularly in the public sector — have special requirements or accounting procedures for changes, so the contractor needed to investigate those ahead of time.
The advisor also encouraged her to develop a checklist of project risks that might trigger work changes. Common examples include an unusually tight schedule, poor design documents and environmental hazards. The contractor should share a copy of the checklist with the project owner before work begins.
Getting paid
Upgrading her accounting system and establishing the new procedures took some time. But it proved to be time well spent. Thanks to the help of the contractor’s financial advisor, getting paid for her next change order went much more smoothly.
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