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The 2 Reasons So Many Construction Change Orders Get Missed – Redpath

Construction Change Orders Slipping Through the Cracks? Ask These Questions to Get On Track

by Joel Newby, CPA

February 11, 2021 - Scope changes can be either a challenge or an opportunity for construction companies. The difference is in how they account for them – in fact, addressing scope changes with clients is a key differentiator between best-in-class construction, real estate, and engineering companies and those that may struggle.

Companies who have both a clear process and adherence to addressing scope changes likely establish better long-term relationships with their clients and their internal team by building a culture of trust. 

Improperly tracked scope changes are a contributing factor to many unprofitable projects or jobs that go off the rails, and the way you address them (or don't) can have a lasting impact on profitability and customer relations.

The Main Reasons Scope Changes Go Untracked

Missing line items, incomplete drawings, lack of communication – the reasons scope changes get skipped can run the gamut. Whatever the reason, they add up when it comes time to close out the job. In our experience with construction companies, it often boils down to clarity and clear communication.

Sometimes, projects start in flux, with scope of work changing rapidly. In the fluctuation, what qualifies as a change order can be tough to pin down. Once a project starts, time is of the essence to many clients. They may give you a notice to proceed with changes without hashing out the particulars of the change order.

Having to question the client or their superiors can be an uncomfortable discussion, and conflict-averse team members might feel that certain work doesn't necessarily rise to the level of a scope change – which is often a direct result of a lack of clarity around what "counts" as a scope change.

Establish a Process for Change Orders and Train it Down

The best way to address scope changes with clients is to start internally – to clarify with your team what scope changes mean to your business, what counts as a change in scope, and what to do if one is identified.

Many times, when a project begins amicably, there's an assumption that the scope is understood and changes will be addressed as they come up. But without formalizing how they're addressed, it's easy for change orders to get bypassed, which results in potentially leaving profit or reimbursement on the table. In addition, the trustworthiness of your business is now in question with this customer who is potentially a candidate for a long-term relationship. 

That's why it's important to identify the potential for scope changes early in the process and get adherence from all members of your team. Project managers are often relied upon to notice that out-of-scope work, but every member of your team can be a potential checkpoint for scope changes.

Does Your Team Know How to Handle Scope Changes?

Even if you don't formalize a process for addressing scope changes, it's always worth reviewing them with your team. Ask these questions about how your company handles change orders internally:

  • Is everyone at your company in agreement about what counts as a scope change worthy of a change order? If possible, gather examples of work done outside of scope to illustrate the many forms it can take and how to identify it in the field.
  • Do your team members know the value of properly tracking scope changes? Do they understand that work performed outside of scope can be detrimental to your company's schedule, workforce, and bottom line?
  • Does everyone know what to do if they think they might be starting work outside the scope of the project? Is there a chain of command for addressing scope changes? Do employees know who to contact in the organization if they incur a potential change in scope?

Because they directly affect the work your company does and how you're compensated for it, scope changes can affect nearly every aspect of your business, from revenue to staffing and accounting. When your team isn't prepared to address scope changes, or if they're addressed after the work is completed, you're likely to find yourself in arbitration at best – and unpaid at worst.

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Joel Newby, CPA

Joel Newby, CPA

Joel Newby is a partner and leader of the construction service practice area. He also serves as a client manager specializing in assurance, tax planning, and consulting in the construction, engineering, and real estate industries. He earned the professional certification of CCIFP (Certified Construction Industry Financial Professional). Joel has provided public accounting services since 1997 and has been at Redpath and Company since 2007.

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