Change Orders
What is a Change Order? A change order is a formal request to make changes to a construction project.
A change order is used whenever a change must be made to a construction project. It ensures that the project owner, the architect, and the construction company stay on the same page.
Change happens, so there has to be a way to account for that. Any number of things could come up. Maybe there's a shortage of materials. Maybe the light fixtures aren't working out. Maybe the project owner wants to move a wall. It all happens, and there are many more reasons a change might be necessary.
At the end of the day, everybody involved in the project has to be properly informed on the proposed changes, and then sign off on it. This prevents a lot of legal trouble in the long run.
How Does It Work?
Whoever initiates the change must submit a Change Request. Let's say the contractor wants to replace hard wood flooring with vinyl. They determined that the area would have too much moisture for wood, and they want a material that will stand up to the test of time.
The contractor prepares a Change Request. It outlines the specific change they want to make, the effect it will have on cost, and the effect it will have on the timeline.
In this case, they have a specific flooring product listed. This allows the project owner and the architect to review the exact material being proposed. The budget for materials will actually be reduced by switching to vinyl floor, but labor cost will go up because the crew needs to remove the wood flooring first. The timeline will be increased by a week as they wait for the new flooring to arrive.
The project owner and architect review the proposed changes. They agree that the switch will be necessary, and the changes to the cost and timeline are acceptable. Both parties agree with the change request and everyone signs off.
Now For The Accounting
Now the accountant has to clean up after all this activity. The original contract has been altered, which means the budget for labor and materials has changed. The total contract amount has also changed, and the records will not be accurate.
If only there was a convenient way for the accounting software to adjust for this change order, that would save all sorts of time and trouble for the accounting department. Fortunately, there is. Using A-Systems JobView, all these adjustments can be made on one screen.
A-Systems JobView to the Rescue
On this screen, the change order is given an ID and name. Dates can be entered to record when the change was requested, when it was submitted to the architect/engineer, when you expected a reply, and when you actually got that reply. You can enter the cost code of the activity that will be effected, along with the cost of that change. This will automatically update the budget and profit figures, keeping the accounting accurate and up to date.
Change orders are an essential part of job cost accounting. A-Systems JobView facilitates that process and saves you time.
What Are The 4 Types of Change Order?
The four types of change order are:- Zero Cost - This is used when a change must be made, but the cost isn't affected. Most changes would require a change of price, like if a home owner wanted to swap out a laminate floor with hard wood floor. But other times the costs are not impacted, or are only impacted so slightly that it's not worth changing the price. Paint color is a great example of this. If a homeowner decides they want to change the paint color, it's still going to cost basically the same amount. If, on the other hand, they wanted to change the brand or type of paint, that would affect the price.
- Lump Sum - This is used when the contractor can put a specific price on the change. If there will be a known amount of labor and materials added, costs can be accurately calculated and a price can be given. Let's say stucco is being applied to the outside of a house, but the contractor discovers foundation damage. The exact cost of the repair is not known, but they do know they need to bring in a subcontractor to deal with the problem before proceeding. Eventually a cost can be determined, but permission to perform the additional work will need to be given before they bring in the subcontractor.
- Time & Material - This is similar to lump sum, only the exact amount of time or materials cannot be estimated beforehand.
- Unitary Cost - This is used when it's just a simple matter of adding more items to the job. A landscaper may need to add another cubic yard of mulch, or maybe a project owner requests another hinge on each door. It's simple to calculate the amount of extra items and add the cost to a change order.