Change order accounting in contract management jobs requires that the accounting department of the contractor justify and prove the need for a change in the original estimated cost of a job. Accounting procedures allow a contractor to segregate costs and help both parties determine the correct amount that the contract management job in should cost.
While change order accounting is considered dull by many, there is a potentially high amount of money at stake and without a change order accounting system in place for contract management jobs, things would fall through the cracks and excess money would be spent per contract.
With this in mind, the FAR takes into account five distinct changes clauses based on the type of contract. These clauses provide for the contracting officer to file on the following bases: a) They are authorized when specific changes are made within the general scope of the contract or b) An equitable adjustment to the contract price and/or delivery schedule changes including the performance of the contract.
In section 2 a contractor can claim an increase in the contract price. The contractor makes a claim by submitting an REA, which will prove price and/or schedule adjustment. If a good change order accounting system is in place it can provide the contractor with the data needed to complete the claim.
Changes fall into two specific types which are recognized by boards and courts: actual and constructive.
Actual Change Orders
When actual changes occur as a result of an order issued by the contracting officer that is in line with the changes clause, it is a two-step process. First, the contracting officer issues a unilateral modification in the change order. It describes the type of change in the work contracted. Next, there is an execution of a supplemental agreement. This latter agreement is a bilateral modification. It makes the actual changes to the pricing and schedule.
Constructive Change Orders
Constructive changes can occur as a result of work being performed that is beyond the scope of the original contract management job agreement. This can happen as a result of an informal order or through the government's fault. Two examples of this include if a government inspector rejects conforming goods or a government engineer provides defective site maps.
Contract management jobs that are adversely affected by this constructive change would need to rely on a change order accounting system to get full recovery of additional costs for work performed.
Utilizing the Changes Clause
Through the changes clause, there can be an adjustment made to the contract price, which can be either increased or decreased. This is determined through change order accounting which figures additional costs by extraction of data from the accounting system. It may require additional work not outlined in the original contract where the contractor will need to expand accounts to cover additional labor, material purchases, inter-company transfers, and cost increases.
Operating Without a Change Order Accounting System
Operating without an effective change order accounting system in place for contract management jobs is not a good idea. When a contractor submits an REA that is substantial, there will be no way to figure out the actual costs incurred to produce the work change. Since there will be no actual costs, there will be no way for the contractor to substantiate the claim.
Courts are less likely to approve the claim without an actual cost method in place. This is because there is no way to provide the court or contracting officer documented and substantiated underlying expenses, which will ensure that the final amount requested is equitable and not slanted towards the government or the contractor.
Estimating Cost Increases
While estimating costs can occasionally be accepted as an alternative, it will take contractor testimony and many hours to acquire purchase orders for materials. In the end, the claim will be considered less credible than actual costs and can be easily challenged.
Total Cost Method
The only other alternative is to implement the total cost method, which takes the estimated contract value originally submitted and the actual higher costs incurred. However, based on many factors, courts are very likely to reject a claim based on the total cost method without substantial proof certain factors came into play.
A detailed cost analysis can also be performed. But it is often too complex and time-consuming for in-house execution. Implementing and maintaining an effective change accounting order system is much more logical and is standardized in the industry.
Complex contract management jobs usually require the contractor to implement a change order accounting clause for any changes that are expected to exceed $100,000. This clause will affect the evidence presented to a court to support a contractor's claim. Contracting officers require change order accounting and it is mandatory that the contractor present actual costs, not estimates, or utilize the total cost method.
Courts will listen to the total cost method if the contractor can prove actual losses, reasonableness of the bid, reasonable actual costs, and added costs. This is extremely difficult to prove.
