In the construction industry, plans rarely go off without a hitch. The initial scope of work, calculated by architects and engineers, often faces real-world challenges that necessitate changes during construction. These changes, known as “change orders,” can complicate the already intricate world of construction accounting.
For general contractors, managing these change orders, especially when subcontractors bypass formal processes, can be a daunting task. This blog explores this common challenge, the importance of addressing it, and the shortcomings of traditional construction accounting systems in handling such complexities.
The Challenge
As a general contractor (GC), you have a contract with the project owner and multiple subcontracts with various subcontractors. A key element of these agreements is the “scope of work.” Initially, this scope is based on detailed estimates and calculations provided by architects and engineers. However, during construction, real-world conditions often necessitate changes, resulting in “change orders.”
The challenge arises when subcontractors need to perform additional work beyond the original agreement. Instead of formally submitting a change order, subcontractors often send invoices for the additional materials or work. This leaves you, the GC, with the task of identifying and categorizing these invoices as change orders. Furthermore, you must record these change orders in the contract with the project owner to ensure they recognize the additional payment needed and provide the necessary funds.
Cost of Inaction
Inaccurate Budgeting and Forecasting
Misidentifying or neglecting to record change orders can lead to significant discrepancies in the project budget. This makes it difficult to forecast future costs accurately, potentially resulting in budget overruns.
Payment Delays and Penalties
Inaccurate or delayed recognition of change orders can result in delayed payments to subcontractors. This may lead to penalties and interest charges, further inflating project costs.
Legal Disputes and Liabilities
Failure to manage and document change orders properly can be seen as a breach of contract. This can lead to legal disputes with both project owners and subcontractors.
Claims and Liens
Subcontractors who do not receive timely payment for additional work may file claims or liens against the project. This can complicate property ownership and project financing.
Extended Overheads
Extended project timelines increase overhead costs, such as site management, equipment rentals, and labor costs. These additional expenses can significantly impact project profitability.
How Can APARBooks Help?
Our system offers a seamless solution to the complexities of managing change orders. With just a few clicks, you can effortlessly identify and categorize invoices as change orders, ensuring they are properly recorded in both your subcontractor agreements and the contract with the project owner.
When you record an invoice on our system, simply check “This bill is a contract Change Order” to automatically categorize this bill as a change order. You can manually adjust if this bill is fully or partially the change order.
To record this bill as a project change order that needs to be submitted to the project owner, simply check the box to reflect it.
Why Choosing APARBooks?
Are you ready to eliminate the headaches and inefficiencies of managing change orders in your construction projects? Wish to see the invoice tracking in more detail? With APARBooks, you can streamline the entire process with just a few clicks, ensuring accurate and transparent financial records every time.
Contact Us Today to schedule a personalized demo and see how our system can revolutionize your accounting management.
FAQs About Change Orders in Construction and How APARBooks Helps
1. What is a change order in construction accounting?
A change order is a formal document that modifies the original scope of work in a construction contract. It reflects changes such as additional labor, materials, or design modifications and usually results in extra costs or extended timelines.
2. Why do subcontractors sometimes skip submitting formal change orders?
Subcontractors often face tight schedules and may send invoices directly for additional work without initiating a formal change order. This bypasses the necessary documentation and leaves general contractors responsible for identifying and reconciling these unapproved costs.
3. What are the risks of not properly managing change orders?
Improper handling of change orders can result in:
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Budget overruns
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Payment disputes
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Delays in owner reimbursements
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Legal liabilities
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Potential liens from unpaid subcontractors
4. How can APARBooks help with change order tracking and management?
APARBooks allows contractors to easily flag invoices as change orders during entry. You can indicate if it’s a full or partial change, link it to a subcontractor agreement, and submit it for project owner approval—all with just a few clicks.
5. What happens if change orders aren’t recorded in the contract with the owner?
If change orders are not formally added to the owner contract, you may not receive reimbursement for the additional work. This directly affects project cash flow and profitability.
6. Can APARBooks prevent subcontractor disputes over unpaid change orders?
Yes. APARBooks creates a transparent audit trail for every change order—who requested it, when it was logged, and its approval status—reducing confusion and helping resolve subcontractor disputes swiftly.
7. How does APARBooks help with budgeting and forecasting around change orders?
Once a change order is categorized, APARBooks updates project budgets and forecasts in real-time, allowing for accurate financial projections and immediate identification of cost impacts.
8. Is APARBooks suitable for small to mid-size contractors managing multiple subs?
Absolutely. APARBooks is designed to be scalable and user-friendly, making it ideal for general contractors who manage complex workflows involving multiple subcontractors and frequent change order events.
