Change orders adjust three elements of a project: the scope of work, the contract price, and the project schedule. A change order is a formal written amendment to the contract documents that reflects an approved modification to what will be done, how much it will cost, and when it will be completed. They typically arise from owner requests, design changes, or unforeseen conditions that require altering the plan. By updating scope, cost, and timing, all parties agree on the new path, and payment terms and the project timeline are adjusted accordingly. Other factors like cosmetic choices, site conditions, or external constraints can influence the work, but the standard purpose of a change order is to document approved changes to scope, price, and schedule.

MACRS stands for Modified Accelerated Cost Recovery System, the tax depreciation framework for tangible business property. It provides accelerated depreciation for eligible property, meaning larger depreciation deductions in the early years of an asset’s life. Those deductions reduce taxable income in those years, lowering taxes owed and boosting after‑tax cash flow early in the asset’s life. In construction, this matters for equipment, machinery, and certain improvements placed in service; land itself isn’t depreciated, and different property kinds (like real property) use specific class lives under MACRS. It’s a tax rule, not a financing technique or a method of recognizing revenue, and depreciation under MACRS is subject to conventions and potential depreciation recapture when the asset is sold. For example, a large early depreciation deduction can significantly cut taxes in the initial years, improving the project’s early cash flow.

In IRS 460, contract completion for a long-term construction project is tied to progress milestones and final status. The contract is considered complete at the earlier of two events: either the project is usable by the customer and 95% of allocable costs have been incurred, or the project reaches final completion and is accepted by the customer. This means revenue and tax recognition can occur when substantial progress has been made and the project can be utilized, or when the job is finally completed and formally accepted. This is the best choice because it recognizes completion based on real progress (the heavy lifting is mostly done, costs are near fully incurred) while also keeping a safety net for formal final completion and customer acceptance. It prevents delaying recognition too long if the project becomes usable and costs are largely incurred, and it also accounts for situations where final acceptance occurs later. Options that rely on only final completion, or only one milestone without the parallel condition, would either delay recognition unnecessarily or ignore an important progress trigger.

Cost-type contracts are designed so the buyer reimburses the contractor for allowable, allocable costs actually incurred and also pays a fee for profit. This structure addresses uncertain or variable costs by not locking in a fixed price upfront. The arrangement can include a Guaranteed Maximum Price (GMP), which caps total costs while still allowing reimbursement of actual costs up to that limit, plus the fee. That combination—reimbursement of allowable costs plus a fee, with the possibility of a GMP—is what makes this statement true. The other notions don’t fit cost-type contracts: they are not fixed-price, they do reimburse costs, and they typically include a fee.

The main idea is that GAAP allows two different methods for recognizing revenue on construction contracts, chosen based on how predictable the project’s outcomes are and how long the project lasts. For most long-term contracts, revenue and profit are recognized as work progresses using a percentage-of-completion approach. This method ties revenue to the level of work performed to date, using the ratio of costs incurred to date to the total expected costs to complete. It provides a better match of revenue with the costs incurred to generate that revenue and reflects ongoing progress toward finishing the contract. If, however, the outcomes cannot be reasonably estimated or there are significant uncertainties, revenue and profit are deferred and recognized only when the contract is completed under the completed-contract method. This avoids recognizing income on unreliable estimates and is appropriate when there's substantial risk or difficulty in measuring progress. For some short-term engagements, revenue may be recognized when control of the promised goods or services transfers to the customer. This aligns revenue with the actual point at which the customer obtains the benefits and control, which can occur before or after substantial progress on a longer project, depending on the nature of the contract. In contrast, recognizing revenue only when cash is received is not GAAP, and recognizing revenue at the end of every project regardless of progress ignores the ongoing transfer of value and is not consistent with accrual accounting. Under GAAP, revenue recognition is governed by when performance obligations are satisfied and when the contractor has the ability to recognize revenue in a way that reflects the progress and risk of the contract.