A verbal change order is still revenue
The site instruction was given, the crew did the work and the cost is in the job. The paperwork is somewhere in a chain of emails.
- Costs on unapproved change work are recognised as incurred, which distorts percentage complete if the related revenue is not recognised.
- Whether revenue can be recognised depends on enforceability of the right to payment rather than on the reasonableness of the claim.
- Unapproved change orders are one of the largest sources of underbillings on a work in progress schedule.
- The practical control is documentation at the point of instruction rather than reconstruction during a claim.
- A register of pending change orders with status and value is the artefact that makes this manageable.
Every construction project generates changes. Ground conditions differ from the survey, the client wants something moved, a design detail does not work in practice.
The work happens, because a project cannot stop while paperwork is prepared, and the cost goes into the job immediately. The associated retention is withheld from the eventual billing too, which is why the balances described in retention as working capital tend to grow on exactly the jobs with the most pending change work.
The revenue is another matter. It depends on whether a right to payment exists and can be enforced, which is a question about contracts rather than about whether the work was genuinely required. That distinction feels unfair on site, where the work was clearly instructed, and it is the distinction the accounting turns on.
Why unapproved work distorts the schedule
Under percentage of completion accounting, costs incurred drive the completion percentage. Costs on change work therefore increase percentage complete immediately.
If the associated revenue is not recognised, the job appears to have consumed more of its budget for the same contract value, which reduces estimated margin.
That is why unapproved change orders are one of the most common causes of large underbillings, as the work in progress schedule shows to any reader.
It also affects the estimate at completion, since the remaining budget now looks smaller than it is, which distorts the very number described in the estimate at completion.
Four documentation levels
These sit on a spectrum, and the accounting consequence differs sharply along it.
What determines whether revenue can be recognised
The question is whether an enforceable right to payment exists for the work performed, which depends on the contract terms and on the evidence of instruction.
Where the right exists but the amount is not agreed, the amount becomes an estimate subject to constraint, which means recognising an amount unlikely to reverse significantly.
Where the right itself is uncertain, recognition is generally not appropriate until it becomes probable, which is a different threshold from the amount question. Both assessments have to be revisited as negotiations proceed, so a position taken in month three is not a position for the life of the job.
Both assessments are fact specific and both benefit enormously from documentation created at the time rather than assembled during a claim.
Fairness is not the test. An enforceable right to payment is.
Three positions and what to do
Most pending change work sits in one of three states, and the finance response differs for each.
| Position | Accounting question | Action |
|---|---|---|
| Approved and priced | None. Contract value increases. | Update the contract value and the schedule promptly rather than at month end. |
| Instructed, not priced | How much can be recognised, subject to constraint. | Record the scope, estimate the amount and document the basis. |
| Disputed or unrecorded | Whether a right to payment exists at all. | Assemble contemporaneous evidence now, and consider whether cost should be recognised without revenue. |
Recognition of change orders and claims depends on the applicable framework, contract terms and enforceability. Confirm the treatment with your auditors and legal advisers.
The cost went into the job on Tuesday. The revenue depends on an email nobody kept.
ChatFinThe register that prevents most of this
One artefact does most of the work here, and it belongs with the project team rather than with finance.
Log every instruction the day it is given
Scope, who instructed it, date and estimated cost, regardless of whether paperwork follows.
Attach the contemporaneous evidence
Site reports, photographs, emails, gathered while they exist rather than during a claim eighteen months later.
Track status through to approval
Instructed, submitted, approved, priced, with an ageing report, because pending change orders age like receivables.
Report the value monthly
Pending change order value by job, alongside the schedule, which is what makes underbillings explainable, as in close metrics that change behaviour.
Two consequences of leaving it late
Both are commercial as well as accounting problems.
Negotiating from memory
A claim assembled after the fact relies on reconstructed evidence, which weakens the negotiating position and usually reduces the settlement.
Estimated margin looks wrong
The job carries costs without matching revenue, so margin appears to have deteriorated when in fact the revenue has not yet been recognised, which distorts every review that follows.
Where ChatFin helps
We work on the finance side of this: the visibility of pending change work and its effect on the reported position.
Contract interpretation, claim strategy and the assessment of enforceability remain with your commercial and legal advisers.
AI Cost Estimator for the CFO Office
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Frequently Asked Questions
Can we recognise revenue on an unapproved change order?
It depends on whether an enforceable right to payment exists for the work performed and, if so, whether the amount can be estimated within the constraint on variable consideration. Both are fact specific assessments that turn on contract terms and evidence, so take them to your auditors.
What if the client accepts the work but not the price?
That is generally a variable consideration question rather than an existence question, since the right to payment is less doubtful than the amount. The recognised amount is constrained to what is unlikely to reverse significantly, and the basis should be documented.
How does this affect the WIP schedule?
Costs increase percentage complete immediately while revenue may not be recognised, producing underbillings and an apparent reduction in estimated margin. Reporting pending change order value alongside the schedule is what allows a reader to interpret the position correctly.
What documentation matters most?
Records created at the time: the instruction itself, daily reports, photographs and correspondence. Evidence assembled during a claim is materially weaker, both for the accounting assessment and for the commercial negotiation that usually follows.
The cost is immediate. The right to payment has to be evidenced.
A change order register with status, value and contemporaneous evidence attached is the single artefact that keeps this from becoming a claim exercise.
If you want a first year range for change order tracking alongside job costing, the estimator gives one in about a minute.
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We will walk through the workflow behind this article on the system you already run, using your own data, and show what a first phase would actually cover.
This article is general information for finance and accounting teams. It is not legal, tax, accounting or investment advice. Dates and thresholds are given as published at the time of writing and several of these timelines have moved before, so confirm the current position with your advisers and with the relevant authority before acting.