In the world of construction as it relates to State construction contracts, change orders can potentially determine whether a job ends profitably or at a loss. The contracted work can run for years. As a result, the contracted work can change as the job progresses due to modifications in job performance and job conditions that can alter the estimated profitability of a contract.
The recent passing of House Bill 403, Senate Bill 826, Construction Contracts – Change Orders (State Procurement Change Order Fairness Act) alleviates some of the issues with having to continue work without written change orders. As highlighted in the bill, “This bill prohibits a State procurement unit from requiring a prime contractor on a State construction contract to begin work on a change order until a written change order is issued that specifies whether the work is to proceed …” Prime contractors (contractors) in the past have had problems with receiving written change orders. In order for the contractor to keep working they would need to outlay their own capital to continue the contracted work in the hopes of eventually obtaining the written change order. This did not always work out in favor of the contractor. At the end of the work, if written change orders were not provided, it gave the State the opportunity to “negotiate” a new settlement on the work lacking the written change orders. This is where the contractor could potentially run the risk of nonpayment of the costs outlaid in advance.
The State Procurement Change Order Fairness Act also states that, “If the amount to be paid under a change order does not exceed $50,000, the procurement unit must pay an invoice for work performed within 30 days of receiving the invoice.” This doesn’t seem like much, but for a small prime, it’s the difference of forging ahead on the contract or not paying their laborers in time.
The bill takes effect June 1, but the provisions related to change orders take effect July 1. Looking ahead, the “…Board of Public Works will be proposing regulations that provide for an expedited change order process for change orders valued at more than $50,000 by Jan. 1, 2017.”
The accounting for change orders depends on the factors that create the change and can be treated differently for each change order. Some change orders generate no additional revenues and some generate additional revenue and changes in the estimation process. The additional price of the estimated contract revenue depends on whether the price and scope have been approved; 1) If the change order was approved for scope and price, the estimation process would include the price of the change order, 2) If the change order was approved for scope but not price, the inclusion of the amount in the estimation process would depend on whether you account for percentage of completion or completed contract accounting method, 3) Lastly, if the change order has not been approved for price or scope, it would be evaluated as a claim. The evaluation and recognition of these change orders can impact your job performance and ultimately your financial statements.
WCS strives to deliver a different perspective to our clients outside the scope of traditional accounting offerings. We work to provide the latest trends and changes that will affect your company. If you have questions, contact Angeline White at email@example.com. I95
Weyrich, Cronin & Sorra