General Contractor Change Order Management: The Impact on Revenue and How to Track Them
In the dynamic world of construction, change is often the only constant. Whether it's a client's last-minute design modification or unexpected site conditions, change orders are an inevitable part of a general contractor's journey. While they can signify additional revenue, they also bring forth challenges in project management and bookkeeping. In this deep dive, we'll explore the world of change order management, its implications on revenue, and best practices for tracking them.
1. What Exactly is a Change Order?
A change order is a formal alteration to the original contract, specifying new work requirements, adjustments in the price, or changes in the project timeline. They can arise due to various factors:
Client Requests: Such as design alterations or material changes.
Unforeseen Site Conditions: Discoveries like underground utilities or weak soil that wasn't accounted for in the initial planning.
Regulatory Requirements: Modifications required to comply with updated building codes or regulations.
2. The Revenue Implications of Change Orders
Positive Revenue Impact: Change orders, when managed effectively, can increase project profitability. They often encompass additional work which, when invoiced correctly, can enhance revenue.
Potential for Revenue Leakage: If not tracked or invoiced accurately, change orders can lead to financial losses. The additional labor, materials, and time can eat into profits if they aren't appropriately accounted for.
3. Best Practices in Change Order Management
Clear Communication: Ensure all stakeholders, including clients, subcontractors, and project managers, are on the same page regarding the scope, cost, and timeline implications of the change order.
Documentation: Each change order should be meticulously documented, highlighting the change in scope, the associated cost, and the impact on the project's timeline.
Timely Invoicing: The sooner a change order is invoiced, the better. This ensures timely payment and improves cash flow.
4. Tracking Change Orders - Tools & Strategies
Dedicated Software: Several construction management software solutions have features dedicated to change order tracking. These tools can automatically update budgets, timelines, and generate invoices, ensuring nothing slips through the cracks.
Regular Financial Audits: Regularly revisiting the financial aspects of ongoing projects can help in identifying and addressing any discrepancies arising from change orders.
Integration with Bookkeeping: Ensure your change order management system is integrated with your bookkeeping tools. This ensures seamless transition of data, enabling accurate financial reporting.
5. Challenges in Change Order Management
Scope Creep: This occurs when small, untracked changes accumulate over time, leading to significant project deviations without appropriate compensation.
Client Relations: Repeated change orders can strain client-contractor relationships, especially if not communicated effectively.
Project Delays: Every change order brings with it potential delays, which can impact project profitability and subsequent job schedules.
In the ever-evolving landscape of construction, change orders stand as both opportunities and challenges for general contractors. Proper management can turn these changes into avenues for enhanced revenue, while mismanagement can lead to profit erosions.
If your contracting company is aiming to optimize change order management or enhance its overall financial strategies, Ledger Management is poised to assist. With tailored solutions designed for the unique needs of contractors, we're here to ensure your bookkeeping is on point and your cash flow robust.
Keen on boosting your contracting business's financial performance? Connect with us at Ledger Management and let's collaboratively lay the groundwork for financial success.