How Unexecuted Change Orders Distort Your WIP Schedule

A job is running well. Costs are tracking to budget, billings are current, the WIP schedule looks clean. Then the PM mentions, almost in passing, that there's about $180,000 of change order work that's been done over the past six weeks - work that the field started because the owner verbally approved it, but that hasn't been formally executed yet.

That one sentence changes everything on the WIP schedule. The job that looked profitable is suddenly showing inflated costs against an original contract that doesn't reflect the actual scope. The percent complete is wrong. The over/under billing position is wrong. And if that change order doesn't get approved and signed, the contractor may have just done $180,000 of work they can't bill for.

Unexecuted change orders are one of the most common sources of WIP distortion in construction. Here's how they work, how they break the schedule, and how to handle them correctly.

What an unexecuted change order actually is

A change order is any modification to the original contract scope, schedule, or price. When the owner wants something done that wasn't in the original contract - additional work, a design change, an unforeseen condition - a change order documents the new scope and the agreed price before work begins.

In practice, it rarely works that cleanly.

Field crews start work when the owner tells them to start. Owners give verbal approvals, send emails, or simply assume the contractor will proceed. The paperwork gets drafted, reviewed, revised, and circulated - sometimes for weeks or months while the work is already happening. By the time the change order is formally executed and signed, the costs have already been incurred and the work is already done.

This gap between when change order work starts and when the change order is formally approved is where WIP schedules break down.

How unexecuted change orders distort the WIP schedule

The WIP schedule is built on the relationship between your contract value, your costs, and your billings. Change orders affect all three - but they affect them at different times when they're unexecuted.

Costs move immediately. The moment field crews start change order work, costs hit the job. Labor, materials, equipment - all accumulating against a job budget that doesn't include the change order scope yet.

Contract value doesn't move until the change order is signed. Your revised contract value - the denominator in your percent complete calculation - stays at the original contract amount until the change order is formally executed. This means your percent complete calculation is running against the wrong number.

Billings may or may not move. Some contractors bill for change order work in progress even before the change order is signed. Others wait. Either way creates problems - billing for unapproved scope is a collections risk, and not billing creates an underbilling position that looks like a problem on the WIP schedule.

The result is a WIP schedule that shows either inflated costs relative to contract value (making the job look like it's over budget or further along than it is) or a growing underbilling position (making the job look like it's being mismanaged). Neither tells the true story - and both create questions from bonding agents and bankers who don't know the context.

The right way to handle unexecuted change orders on the WIP

There is no single universally accepted accounting treatment for unexecuted change orders - the right approach depends on the likelihood of approval, the nature of the work, and your company's accounting policies. But there are principles that keep your WIP schedule accurate and defensible.

Track change order costs in a separate cost code. Every unexecuted change order should have its own cost code on the job. This separates the original scope costs from the change order costs and lets you see exactly how much is at risk if the change order isn't approved. It also makes the WIP narrative much cleaner — you can explain exactly what the unexecuted amount is and why.

Include probable change orders in your revised contract value. Under ASC 606 (the revenue recognition standard most contractors follow), you can include the contract value of a change order in your WIP calculation if approval is probable — meaning it's highly likely to be approved based on the facts and circumstances. Verbal approvals from owners, emails confirming scope, and prior course of dealing are all relevant. If approval is probable, update your revised contract value and your estimated cost at completion to reflect the change order.

Document the basis for 'probable.' If you're including unapproved change orders in your WIP, you need to be able to explain why approval is probable and show the documentation that supports that conclusion. An email from the owner saying 'go ahead' is evidence. A verbal conversation with no backup is not.

Disclose material unexecuted change orders in the WIP narrative. Whether you include them in the schedule or not, any material unexecuted change order position should be disclosed in the narrative you submit with your WIP to your bonding agent or CPA firm. Silence on a $400,000 unexecuted change order is the kind of thing that creates trust problems when it eventually surfaces.

The PM communication problem

Most WIP distortion from change orders isn't an accounting problem - it's a communication problem. The field starts work, the costs hit the job, and the controller finds out weeks later when the job cost report looks wrong.

The fix is a simple policy: no change order work starts without a written notification to the controller, even if the formal change order isn't signed yet. An email from the PM saying "the owner verbally approved $85,000 of additional foundation work, we're starting tomorrow, formal CO to follow" gives the controller what they need to track the costs correctly, update the WIP estimate, and flag the exposure in the schedule.

This sounds obvious. It still doesn't happen at most contractors without someone making it a formal expectation.

What happens when the change order doesn’t get approved

Sometimes the owner disputes the change order. Sometimes they acknowledge the work was done but push back on the price. Sometimes the change order sits in review limbo for months while the relationship with the owner deteriorates.

When it becomes clear that a change order is disputed or unlikely to be approved, the accounting treatment has to change. Costs that were included in the WIP under the "probable" threshold need to be reclassified. Revenue that was recognized based on the change order needs to be reversed. The job's profitability takes a hit.

This is painful — but it's the correct accounting. Carrying a disputed change order as probable revenue when the evidence says otherwise is the kind of thing that shows up as a WIP adjustment at year-end, which is exactly what bonding agents and bankers notice and ask about.

The earlier you recognize a change order is in trouble, the earlier you can manage the cash flow implications and adjust your overall company financial picture accordingly.

The bottom line

Change orders are a normal part of construction. Unexecuted change orders on the WIP schedule are also normal — but they need to be managed deliberately, tracked separately, and disclosed clearly. A WIP schedule that silently absorbs change order costs without updating the contract value or flagging the exposure tells the wrong story about every job where it happens.

Build the policy, train the PMs, maintain the documentation, and disclose the exposure. That's how you keep the WIP schedule honest when the scope is moving.