Should unapproved change orders be included in the contract value on a WIP schedule?

The conservative treatment, and the one most construction CPAs hold contractors to, is no. An unapproved change order stays out of the contract price until a signed document exists. Including it inflates earned revenue and understates underbilling, which creates a restatement later and damages credibility with your surety. Some contractors include change orders they consider highly probable, but that judgment needs to be defensible and applied consistently.

Why does underbilling affect bonding capacity?

Bonding capacity is an underwriting judgment based on working capital, equity, track record and how much your reporting can be trusted. Underbilling touches all four. A high balance has two possible explanations, and both concern an underwriter: either the back office is behind on billing, or significant work has been performed on unapproved change orders. Both read as cash flow risk.

What is the difference between underbilling and profit fade?

Underbilling is a timing position: costs incurred in excess of billings at a point in time. Profit fade is what happens when a job finishes below the margin previously reported. They are connected, because underbilling built on unapproved change orders often converts to profit fade when some of that work is negotiated down or written off at close.

How do I tell whether my underbilling is a billing problem or a change order problem?

Split the balance. Ordinary billing timing resolves itself on the next cycle and correlates with your invoicing cadence. Change order underbilling sits for months and correlates with the age of your outstanding change order requests. Most contractors have never separated the two, which is why fixes aimed at billing cadence often do nothing.

How long should a change order take to get approved?

Dodge Construction Network research on specialty trade contractors puts the full cycle at close to seven weeks: roughly 22 days of internal processing before submission, then around 26 days waiting on the general contractor. The internal half is the part a contractor controls, and it drives much of the second half, because thin documentation generates the questions that cause revision cycles.

Unapproved change orders and bonding

Q: How much underbilling is too much?

Surety and construction accounting guidance commonly points to two thresholds: underbillings exceeding roughly 20 to 25% of working capital, or 10 to 15% of total active contract value. Neither is a hard limit and context matters more than the ratio, but past those levels a WIP schedule stops being skimmed and starts being examined.

Of all the ways slow paperwork costs a contractor money, the one nobody connects to the field is the largest. Slow change orders do not just delay cash. They quietly limit how much work you are allowed to bid.

The chain runs from a foreman writing a tag in a truck to a surety underwriter setting your single-job limit, and every link in it is mechanical. Here is how it works, how to measure your own position, and what actually shortens it.

What happens to unapproved change order work on a WIP schedule?

Start where the field process and the balance sheet meet.

When you perform work under a change order that has not been signed, you have earned cost and effort against a contract value that has not officially grown. The conservative treatment, and the one most construction CPAs will hold you to, is that an unapproved change order stays out of the contract price until there is a signed document.

So the cost lands on the job. The revenue does not. The difference appears on your work in progress schedule as underbilling, which is costs incurred in excess of billings.

A little underbilling is normal. It is the arithmetic of doing work before you invoice for it. The trouble starts when it stops being a timing artefact and becomes a permanent balance made of change orders nobody has signed.

A worked example

Take a mechanical contractor doing $18M a year.


Working capital	$2.4M
Total active contract value	$12.0M
Underbilling balance	$680k
Underbilling as % of working capital	28%
Underbilling as % of contract value	5.7%

Against contract value, 5.7% looks unremarkable. Against working capital, 28% is past the range where underwriters start asking questions.

Now split the balance. Say $250k is ordinary billing timing, work performed in the last three weeks that will invoice on the next cycle. The remaining $430k is change order work sitting unapproved, some of it four months old.

That $430k is the number that matters. It is not going to resolve on the next billing run. It resolves when somebody signs, or it does not resolve at all.

How much underbilling is too much?

A WIP schedule is not an internal document. It goes to your bonding agent, your surety underwriter and your bank, and underbilling is among the first lines any of them look at.

The concern thresholds cited across surety and construction accounting guidance land in a fairly consistent range:

Measure	Where underwriters start asking questions
Underbillings as % of working capital	20 to 25%
Underbillings as % of active contract value	10 to 15%

These are not hard limits, and any underwriter will tell you context matters more than the ratio. A contractor with a strong balance sheet and a decade of clean closeouts gets more latitude than one without. But they are the point at which a schedule stops being read quickly and starts being read closely.

What worries an underwriter about a high underbilling balance is that it has two possible explanations, and neither is good:

You are behind on your billing cycle, which says the back office cannot keep pace with the field.
Significant work has been performed on unapproved change orders, which says you are extending unsecured credit to your customers without a signed agreement.

Both read as cash flow risk. Neither is the story you want your schedule telling.

How does this actually limit what you can bid?

Bonding capacity is not a number handed down once. It is an underwriting judgment revisited every time you ask for a bond, built on working capital, equity, your track record, and how much your reporting can be trusted.

Underbilling touches most of that. It affects the working capital calculation. It affects the ratios your bank uses. And it affects the least quantifiable input of all, which is whether the underwriter believes your numbers.

The result is rarely a dramatic refusal. It is that your single-job limit does not grow, or grows more slowly than the company does. You stay eligible for the work you have always done and become ineligible for the work that would have moved the business forward.

This is what makes it dangerous: it is invisible until you need it. Most contractors do not notice the constraint forming. They discover it the day they ask to increase their limit for a job they want to bid and are told no. By then the balance has been building for three or four quarters, and there is nothing to be done before the bid deadline.

Why does profit fade make it worse?

There is a compounding effect worth naming.

Underbilling built on unapproved change orders ends one of three ways. Some gets approved at full value. Some gets negotiated down. And some gets written off entirely, not because the work did not happen but because the documentation would not support the claim. Dodge Construction Network research found that 77% of specialty contractors have written off change order work as bad debt.

When that happens, revenue you had already earned on the job disappears at close. That is profit fade, and sureties watch for it specifically. A pattern of jobs finishing below their reported margin damages the credibility of every future schedule you submit, and credibility is far harder to repair than a ratio.

So underbilling is not merely a snapshot problem. It is a leading indicator of restatements, and underwriters read it that way.

What is actually causing it?

Trace the chain back and it starts somewhere unglamorous.

A superintendent tells a foreman to proceed. The work happens. The tag gets written at the end of the shift, or the next morning from memory, and the description is thin because the foreman spent the day doing the work rather than documenting it. The signature never gets captured, because the person who authorized it has gone home.

Then the tag sits. Dodge research puts internal processing at roughly 22 days before a change order request even reaches the general contractor, and another 26 days waiting on their side. Seven weeks, near enough, from work performed to authorized.

For seven weeks that work is cost on your books with no contract value against it. Multiply it across every open job and the underbilling balance is not an accounting anomaly. It is an accurate measurement of how long your paperwork takes.

Your WIP schedule is a report on your field process. It just arrives in a format that makes it look like an accounting problem, which is why it usually gets handed to the controller rather than to operations.

How do I measure my own position?

You do not need a project to find out where you stand. Three figures, and the first two are already on your schedule.

1. Your underbilling balance, as a percentage of working capital and of total active contract value. Compare against the ranges above. Near or past either one, the rest of this is worth a morning.

2. How much of that balance is unapproved change orders rather than ordinary billing timing. Most contractors have never split it. The two halves have entirely different fixes, and treating a change order problem as a billing cadence problem is why so many attempted fixes achieve nothing.

3. Your median days from work performed to change order approved, with the ninetieth percentile beside it. Take fifty recent change orders and record four dates:

Date the work was performed
Date the tag was written
Date the request was submitted
Date approval was received

Three intervals fall out: field to office, office to submission, submission to approval. The gap between the median and the ninetieth percentile tells you whether you have a systemic problem or an exception-handling problem, and that determines what kind of fix is appropriate.

Most contractors cannot produce the third number, because the date the work was performed is not captured anywhere their system can reach. If that is you, the absence is the finding. You cannot manage an interval you have never been able to see.

What actually shortens the cycle?

The instinct is to chase general contractors harder. It is the wrong lever. Roughly 22 of the 48 days sit inside your own building, and the half you control causes much of the half you do not: thin descriptions and missing signatures generate the questions that turn one review cycle into three.

Three things move the number.

Capture the tag where the work happens. Photographs and a signature taken while the person who authorized it is still standing there. That removes days of travel time and most of the argument about whether the work was authorized at all.

Price it against the governing contract before it leaves the building. Rate schedules get amended, superseded and renegotiated. A line that does not match the agreement is a guaranteed revision cycle, and it is entirely mechanical to check.

Track the ageing of everything outstanding. Every unsigned request, whose desk it is on, and how many days it has been there. It is the least glamorous item on this list and consistently the screen people use most, because it turns a vague frustration into a specific conversation with a specific person.

None of this requires replacing your accounting system. It requires the paperwork between the field and the office to stop taking seven weeks.

What separates the contractors who do not have this problem?

Across the research and in practice, the ones with clean WIP schedules tend to share four habits:

They capture the authorization at the moment of authorization, not retrospectively.
They price against the contract rather than from memory, so the first submission is defensible.
They review outstanding change order ageing monthly, alongside the WIP, not separately from it.
They treat the field-to-office interval as an operations metric, owned by someone in operations rather than by accounting.

None of those are technology. Technology makes them cheap to sustain at volume, which is a different claim and an honest one.

The argument worth making internally

If you are trying to get attention for this inside your own company, the write-off number is not your strongest card. It is real, but it sounds like a cost of doing business and it competes with every other cost of doing business.

The stronger version is this: the size of job we are allowed to bid is partly a function of how fast our paperwork moves.

That reframes a back-office irritation as a constraint on what the company is permitted to become. It is the version that gets a budget.

It also happens to be true.

Underbilling thresholds are drawn from published surety and construction accounting guidance. Change order cycle times and write-off rates are from Dodge Construction Network research on specialty trade contractors. These are industry figures, not ours. Where your own numbers differ, yours are the ones that matter.

How unapproved change orders quietly cap your bonding capacity