Change Orders: Stop Doing Extra Work for Free
Most contractors do not lose margin on the bid. They lose it in the field, one unpriced change at a time. Here is how to price, paper, and bill every change so the job you finish is as profitable as the job you sold.
The short version
Every change costs you real money whether or not you bill for it. Price changes before the work happens, get a signature every time, bill them on the next invoice instead of at closeout, and track them as separate line items in your job costing. On a typical $600,000 job, that discipline is worth around $38,500.
How a profitable job loses $38,500
Here is a pattern I see constantly with San Diego contractors. You sign a $600,000 addition in Encinitas with a $528,000 cost budget. Planned profit: $72,000, a healthy 12 percent.
Then the job starts moving. The owner wants the window opening shifted. The city inspector wants extra shear wall. The tile that was specced is on backorder, so the owner picks a pricier one. None of these are big on their own, maybe $2,000 to $5,000 each. By the end of the job you have performed $38,000 of work that was not in the contract.
If you priced and billed each change with a fair markup, you added roughly $47,500 of revenue and your margin actually improved. If you handled them on a handshake and billed only the ones you remembered at closeout, you collected maybe $9,000 and ate the rest. Same crew, same work, same finished project. One version earns $81,500. The other earns $43,000.
Final profit on the same $600,000 job
Price the change before you build it
The most expensive sentence in construction is “we will figure it out later.” Once the work is done, you have zero leverage and the owner has already mentally spent the money. Price every change before the crew touches it, even if the price is rough.
And price it like a bid, not like a favor. Say a change needs $2,400 of materials and 40 labor hours at a $35 wage. Your true labor cost with payroll taxes, workers comp, and benefits is closer to $49 per hour, so the real direct cost is about $4,360. Add overhead and profit, say 20 percent combined, and the change order should go out around $5,230. Contractors who quote the bare $2,400 plus wages are funding the change out of their own pocket and do not know it.
Get it in writing, every single time
If you do home improvement work in California, this is not optional. The CSLB requires changes to a home improvement contract to be documented in a written, signed change order before the extra work is done, and unwritten extras are extremely hard to collect if the relationship goes sideways. On commercial and public work, your contract almost certainly has a clause saying unauthorized extra work is unpaid work.
A change order does not need to be fancy. One page: description of the change, price, how it affects the schedule, and two signatures. A text message thread where the owner says “yes, go ahead, I understand it is $5,230” is far better than nothing, but a signed form is better still. The habit that works in the field is simple: no signature, no work, no exceptions. Owners adjust to this faster than you would expect, and it makes you look organized rather than difficult.
Bill it now, not at closeout
Signed change orders that sit in a folder until the final invoice cause two problems. First, you are financing the owner’s upgrades with your own cash for months. Second, closeout is exactly when owners get fatigued and start questioning every line. A $5,230 change billed the month it happened gets paid without a blink. The same charge appearing for the first time on a final invoice five months later starts an argument.
Put approved change orders on the very next progress billing, and update your schedule of values so retainage and percent complete calculations include them. Your banker and your bonding agent will also thank you, because unbilled change order work makes your work in progress schedule look worse than the job really is.
What change orders do to your books
Track change orders as separate cost codes or sub-jobs inside each project. When change order costs get dumped into the base contract budget, your job costing reports show a job that is mysteriously over budget, and you cannot tell whether you estimated badly or just gave work away. Kept separate, the same report tells you exactly how much extra work you performed and whether you got paid for it.
On percentage of completion accounting, an approved change order raises both the contract value and the estimated cost, which changes your earned revenue on the whole job. Unapproved or disputed changes generally should not be counted as revenue yet, though the costs still hit your books, which drags margin down until the paperwork catches up. This is one more reason to get signatures quickly: it keeps your financial statements honest and your tax estimates accurate.
| Line | Disciplined | Handshake |
|---|---|---|
| Base contract | $600,000 | $600,000 |
| Change orders billed | $47,500 | $9,000 |
| Total cost incurred | $566,000 | $566,000 |
| Final profit | $81,500 | $43,000 |
| Margin | 12.6% | 7.1% |
Make it a system, not a resolution
Willpower does not survive a busy job site. Systems do. Put a blank change order form in every superintendent’s truck or, better, a template on their phone. Review open and unbilled change orders in a ten minute weekly meeting. Add a line to every customer contract that spells out your change order markup so the pricing conversation is already settled before the first change appears. None of this costs money. All of it protects the margin you already earned when you won the bid.
Frequently asked questions
Do change orders have to be in writing in California?
For home improvement contracts, yes. The CSLB requires changes to be in a written change order signed by both parties before the changed work begins. On commercial jobs, your contract terms control, and most contracts make unwritten extras unpayable. Either way, writing protects you.
How much should I mark up a change order?
Start from your fully burdened cost, including payroll taxes, workers comp, and equipment, then add your normal overhead and profit. Many contractors use 15 to 25 percent over burdened cost. The number matters less than putting it in your contract up front so it is never a negotiation mid-job.
Should I stop work until the change order is signed?
For work that is clearly outside the contract, yes, unless there is a genuine safety or code emergency. A one day pause while paperwork gets signed is cheaper than a five figure dispute at closeout. Most owners sign quickly once they see you apply the rule consistently.
How do change orders affect my taxes and WIP schedule?
Approved change orders increase contract value, which flows through percentage of completion into your earned revenue, your WIP schedule, and ultimately your taxable income for the year. Unbilled approved changes show up as underbillings. Clean change order records keep your quarterly estimates and your bonding financials accurate.
Want a second set of eyes on your job margins?
Accounting Fresh works with construction and trades businesses across San Diego County. We will look at your change order process, job costing, and WIP schedule and show you where the margin is leaking.
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