Lets assume I have milestone payments on a project and half through the project I approve a change order which affects the contract value. What is your industry’s standard when it comes to invoicing the client? I understand this should be part of the change order negotiations, but I like to know what scenarios are more common in the industry:
This example should help to understand the situation.
Original contract amount $1M
20% $200K Invoiced
30% $300K Invoiced
This is where I am when I approve a change order for the total of $50K
30% $300K
10% $100K
10% $100K
A. Invoice the client for the total of change order amount at once (right away, after completion of the scope of work associate with the change order, or at the project completion) and no change to the future milestone payments.
Future invoices:
$50K for the change order
30% $300K
10% $100K
10% $100K
B. Prorate all the future milestone payments. The next invoice should include the original milestone amount plus the total of past milestone percentages associated to the change order amount.
Future invoices:
$300K (original milestone amount) + $40K (80% of change order)
$100K (original milestone amount) + $5K (10% of change order)
$100K (original milestone amount) + $5K (10% of change order)
C. Or I invoice for the past milestones amount right away and prorate the future milestones based on the approved change order amount.
Future invoices:
$25K (50% of the approved change order)
$300K (original milestone amount) + $15K (30% of change order)
$100K (original milestone amount) + $5K (10% of change order)
$100K (original milestone amount) + $5K (10% of change order)
Am I missing a scenario? What industry are you at and what is more common in your industry? Saving Changes...
Senior Projects Manager | Field & Marten AssociatesNew Westminster, British Columbia, Canada
Ayat,
The best scenario depends on the impact of this Variation Order. Before I reply to you, I have a question in order to better understand and assess the situation:
I understand this additional job is complete. Was this change order for an additional scope ? If yes, did this additional work affect the schedule for future activites or you were able to accomodate the change and still be on time with regards to the rest of the project ?
...
1 reply by Ayat Rezaeifar
Jan 12, 2016 9:45 AM
Ayat Rezaeifar
...
Good question Rami. I see where you are going with it. I actually thought about it but didn't want to make my question too complicated. This is a hypothetical question by the way. I didn't want to necessarily study the effect of the change order on the project cash flow. I am just curious to learn if there are standard practices in different industries out there.
To answer your question lets assume the change order was for an additional scope which does affect the schedule for future milestones. However, the impact is not big and my company accepts the pushed back dates.
The best scenario depends on the impact of this Variation Order. Before I reply to you, I have a question in order to better understand and assess the situation:
I understand this additional job is complete. Was this change order for an additional scope ? If yes, did this additional work affect the schedule for future activites or you were able to accomodate the change and still be on time with regards to the rest of the project ?
Good question Rami. I see where you are going with it. I actually thought about it but didn't want to make my question too complicated. This is a hypothetical question by the way. I didn't want to necessarily study the effect of the change order on the project cash flow. I am just curious to learn if there are standard practices in different industries out there.
To answer your question lets assume the change order was for an additional scope which does affect the schedule for future milestones. However, the impact is not big and my company accepts the pushed back dates.
...
1 reply by Rami Kaibni
Jan 12, 2016 4:10 PM
Rami Kaibni
...
Well, in terms of taking action in situations like this, it would be a case by case scenario.
Since there was an impact on future milestones then you won't be receiving the remainder amounts on time because you won't deliver 100% on time due to the impact of the VO. In this case, I would charge the client as soon as the ad-hoc variation task is complete in order to make sure I maintain enough cash flow as per what was planned. If you have enough cash flow, it doesn't really matter when you invoice them because at the end they will reconcile your accounts. It is always preferable to invoice VO's as soon as they are complete just to avoid going short on cash flow.
Hope this helps and I would like to know what you think of this as well.
Senior Projects Manager | Field & Marten AssociatesNew Westminster, British Columbia, Canada
Jan 12, 2016 9:45 AM
Replying to Ayat Rezaeifar
...
Good question Rami. I see where you are going with it. I actually thought about it but didn't want to make my question too complicated. This is a hypothetical question by the way. I didn't want to necessarily study the effect of the change order on the project cash flow. I am just curious to learn if there are standard practices in different industries out there.
To answer your question lets assume the change order was for an additional scope which does affect the schedule for future milestones. However, the impact is not big and my company accepts the pushed back dates.
Well, in terms of taking action in situations like this, it would be a case by case scenario.
Since there was an impact on future milestones then you won't be receiving the remainder amounts on time because you won't deliver 100% on time due to the impact of the VO. In this case, I would charge the client as soon as the ad-hoc variation task is complete in order to make sure I maintain enough cash flow as per what was planned. If you have enough cash flow, it doesn't really matter when you invoice them because at the end they will reconcile your accounts. It is always preferable to invoice VO's as soon as they are complete just to avoid going short on cash flow.
Hope this helps and I would like to know what you think of this as well.
...
1 reply by Ayat Rezaeifar
Jan 12, 2016 4:23 PM
Ayat Rezaeifar
...
Thanks for your inputs. I agree with your suggestion. As I said I posted this question to find out if different industries have different standard practices in this regards.
I always check the contract first to see if this is addressed. If not I do a quick cash flow analysis to find out when would be the most appropriate time to invoice the client for the scope of work done under an approved change order!
Well, in terms of taking action in situations like this, it would be a case by case scenario.
Since there was an impact on future milestones then you won't be receiving the remainder amounts on time because you won't deliver 100% on time due to the impact of the VO. In this case, I would charge the client as soon as the ad-hoc variation task is complete in order to make sure I maintain enough cash flow as per what was planned. If you have enough cash flow, it doesn't really matter when you invoice them because at the end they will reconcile your accounts. It is always preferable to invoice VO's as soon as they are complete just to avoid going short on cash flow.
Hope this helps and I would like to know what you think of this as well.
Thanks for your inputs. I agree with your suggestion. As I said I posted this question to find out if different industries have different standard practices in this regards.
I always check the contract first to see if this is addressed. If not I do a quick cash flow analysis to find out when would be the most appropriate time to invoice the client for the scope of work done under an approved change order!
...
1 reply by Rami Kaibni
Jan 12, 2016 7:57 PM
Rami Kaibni
...
You're most welcome Ayat and yes, I totally agree with your statement with regards to th procedure of dealing with this, you got that absolutley right.
Senior Projects Manager | Field & Marten AssociatesNew Westminster, British Columbia, Canada
Jan 12, 2016 4:23 PM
Replying to Ayat Rezaeifar
...
Thanks for your inputs. I agree with your suggestion. As I said I posted this question to find out if different industries have different standard practices in this regards.
I always check the contract first to see if this is addressed. If not I do a quick cash flow analysis to find out when would be the most appropriate time to invoice the client for the scope of work done under an approved change order!
You're most welcome Ayat and yes, I totally agree with your statement with regards to th procedure of dealing with this, you got that absolutley right.
I hope I was able to help. Saving Changes...
Adil MuhammadLead Business Analyst/Test Manager| Ministry of Foreign Affairs, Saudi ArabiaHawthorn, Victoria, Australia
Whatever options I choose will be dependent on what was agreed in the Change Control board which will involve the finance, procurement departments along with other project team and this agreement will form the basis of the contract for change order issued and negotiated with the client.
Whatever options I choose will be dependent on what was agreed in the Change Control board which will involve the finance, procurement departments along with other project team and this agreement will form the basis of the contract for change order issued and negotiated with the client.
Totally makes sense Adil. Thanks for your input. Saving Changes...
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