My customer has not approved a construction change order. Does it belong in contract revenue yet?
An unsigned change order does not automatically disappear from a percentage-of-completion calculation.
By AE Tax Advisors Team · Updated October 28, 2026
An unsigned change order does not automatically disappear from a percentage-of-completion calculation. Contract price must reflect the applicable rules for disputed amounts, enforceable rights and reasonably expected receipts. Billing status and tax contract revenue are different questions. An exempt contract using another permissible method needs a separate timing analysis.
A specific business-owner situation
A mechanical contractor performs extra ventilation work requested on site. The customer accepts the installation but disputes the additional price. Excluding every disputed dollar could understate estimated contract revenue.
Illustrative example, not a client result.
What to establish before filing
- Identify the contract's tax method.
- Read the change-order and dispute provisions.
- Document the support for expected collection and update the estimate consistently.
Which fact changes the answer?
An approved price, an unresolved scope claim and an amount the customer has rejected entirely can produce different estimates. The strength of the legal right matters alongside expected collection.
A mistake to avoid
Do not substitute an accounts-receivable aging report for the contract-price analysis.
Records that support the decision
- Original agreement and amendments.
- Correspondence acknowledging extra work.
- Cost and collection forecasts.
The decision to document
Record the estimated price used for tax and why that estimate remains reasonable at year-end.
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Related questions
- Does a small job that crosses December automatically require percentage-of-completion reporting?
- We bought materials in December for a job starting next year. Do they reduce this year's contract income?
Sources and editorial context
- Section 460: long-term contracts
- Treasury regulation 1.460-1: contract classification and completion
- Treasury regulation 1.460-5: contract costs
- Treasury regulation 1.460-4: contract revenue and estimates
General educational information prepared with AI assistance. No individual professional review is claimed. Apply the relevant tax-year rules to the actual records. Editorial policy · AI disclosure.