How Should Contractors Track Change Orders?

By Martin · Updated 2026-02-02

Track change orders in three categories: Pending (work performed but not yet approved), Approved (signed and incorporated into contract value), and Rejected. Only approved change orders should be included in WIP calculations. Many contractors fail by including pending COs in earned revenue calculations — this inflates margins artificially and creates cash flow surprises.

Why This Matters

Change orders are where construction companies make or lose their margin. I've seen contractors with 8% estimated margins end up at 14% because they documented and got paid for every scope change. I've also seen contractors with 10% estimated margins finish at 2% because they absorbed $200K in "small changes" they never formalized.

The tracking problem comes down to three words: verbal approvals don't count. Your superintendent says "the owner approved it." Your foreman says "they told me to add it." Meanwhile you're incurring costs today while the paperwork sits in limbo — or worse, never gets formalized at all.

Here's what happens without proper tracking: you perform $50K of additional work, you incur $50K of costs, and six months later the owner says "we never approved that." Now you've got cost overrun eating your margin and no documentation to fight back with.

The Three Categories

Every change order falls into one of three buckets, and each shows up differently on your WIP:

Approved Change Orders — Signed by the owner, incorporated into your contract value. These increase your original contract amount immediately. If you started with a $2M contract and got $150K in approved COs, your new contract value is $2.15M. This is the only category that belongs in your WIP calculations.

Pending Change Orders — Work performed but not yet approved. This is the danger zone. You've incurred costs, maybe $80K worth. The owner says "we'll review it" or "we're waiting on the architect." Some contractors add pending COs to their contract value on the WIP — don't. That's artificially inflating your earned revenue. Track pending COs separately as a line item below your WIP schedule. Show them, document them, but don't include them in your margin calculation until they're approved.

Disputed/Rejected Change Orders — Work you thought was extra but the owner says was included. Maybe $30K of costs you can't recover. These become cost overruns. They reduce your margin. The faster you identify these, the faster you can adjust your project forecast and stop the bleeding.

How to Track in Practice

When a scope change comes up, document it immediately — even before pricing it. Create a CO log with columns for: CO number, description, estimated cost, status (pending/approved/rejected), date submitted, date approved.

Update your WIP based on status. If a CO is pending with $25K of costs incurred, your costs are up but your contract value is not — your margin appears to drop. That's correct. It reflects reality: you've done work you haven't been paid for yet. If the CO gets approved next month, your margin recovers. If it gets rejected, you've got a problem to manage.

Best practice: submit COs within 7 days of the scope change. The longer you wait, the harder it is to get approval. Owners forget conversations. Site conditions change. Documentation gets lost.

Common Mistakes

Including pending COs in contract value. I see this constantly. A contractor shows a 12% margin on the WIP, but $100K of that revenue is from unspent COs. The surety spots it, the bank spots it, and suddenly your credibility is shot.

Verbal approvals. "The owner said yes" is not a change order. Get it in writing. Email confirmation at minimum, signed CO form ideally.

Bundling too many changes into one CO. If you submit a $200K change order with 15 different scope items, the owner can cherry-pick which ones to approve. Submit COs separately so each stands on its own.

Not tracking rejected COs. If a CO gets rejected, that cost is now an overrun. Adjust your estimate at completion immediately. Don't wait until the job is 90% complete to realize you absorbed $75K in rejected scope.

The Bottom Line

Change orders are a negotiation tool, not just paperwork. Every scope change is an opportunity to protect your margin — or a risk that erodes it. Track them in real-time, keep pending COs separate from approved COs on your WIP, and get everything in writing. The contractors who do this consistently are the ones who finish jobs at or above their estimated margin. The ones who don't are the ones calling me asking why their margin faded from 10% to 3%.