FAR 43.203—Change order accounting procedures.
Plain-English Summary
FAR 43.203 explains how change order accounting should work when a contract is modified and the contractor must track the costs of changed work separately from the rest of the contract. It addresses two main topics: first, the contracting officer’s duty to alert prospective contractors, before offers are submitted, that they may need to revise their accounting procedures to meet the cost segregation requirements of the Change Order Accounting clause at 52.243-6; and second, the types of direct costs that are normally segregable and accountable under that clause. Those cost categories include nonrecurring costs such as engineering effort and obsolete or reperformed work, costs of added distinct work caused by the change order such as new subcontract work, prototypes, or retrofit/backfit kits, and recurring costs such as labor and material. In practice, this section exists to make sure changed work can be identified, priced, and settled accurately, rather than being mixed into ordinary contract performance costs. For contractors, it is a warning that their accounting systems may need to be adjusted before award or before changes occur; for contracting officers, it is a reminder to set expectations early so the contractor can comply with later cost-tracking requirements. The section is important because poor segregation of change-related costs can lead to disputes, unsupported equitable adjustments, and delays in negotiating or settling change orders.
Key Rules
Advise Offerors Early
Before offers are submitted, the contracting officer should tell prospective contractors that they may need to revise their accounting procedures. This advance notice is intended to prepare them for the segregation requirements in the Change Order Accounting clause at 52.243-6.
Segregate Change Costs
The purpose of change order accounting is to separate the costs of changed work from other contract costs. Contractors should be able to identify and track those costs so they can support pricing, reimbursement, or equitable adjustment determinations.
Track Nonrecurring Costs
Nonrecurring costs are normally segregable and accountable, including engineering costs and costs associated with obsolete or reperformed work. These are one-time or change-specific costs that should be captured separately when a change order affects the work.
Track Added Distinct Work
Costs for added distinct work caused by the change order are also normally segregable, such as new subcontract work, new prototypes, or new retrofit/backfit kits. These costs arise because the change creates additional discrete effort beyond the original scope.
Track Recurring Costs
Recurring costs, including labor and material costs, are normally segregable as well. Even if the work is similar to ongoing performance, the contractor should be able to identify the portion attributable to the changed work.
Responsibilities
Contracting Officer
Advise prospective contractors before offer submission that they may need to revise accounting procedures to comply with the Change Order Accounting clause. Ensure the contractor understands the need to segregate change-related costs for later pricing and settlement.
Contractor
Maintain or revise accounting procedures so costs of changed work can be segregated from other contract costs. Capture and support nonrecurring, added distinct, and recurring costs attributable to the change order.
Prospective Contractor
Evaluate whether existing accounting systems can segregate change-order costs before submitting an offer, and be prepared to adjust procedures if needed to comply with 52.243-6.
Agency
Support contracting personnel in using change order accounting practices that promote accurate cost tracking and fair settlement of contract changes.
Practical Implications
Contractors should review their accounting systems early, because change-order cost segregation is often not built into standard job-cost structures.
If costs are not tracked separately, the contractor may have trouble proving entitlement or the amount of an equitable adjustment.
Contracting officers should not assume contractors already have compliant procedures; the FAR specifically says they are seldom designed for this purpose.
The examples in the rule are practical guides, not an exhaustive list, so contractors should think broadly about any direct cost tied to the changed work.
Poor segregation can create disputes over whether a cost is part of the original contract effort or the changed work, which can slow negotiations and final settlement.
Official Regulatory Text
(a) Contractors’ accounting systems are seldom designed to segregate the costs of performing changed work. Therefore, before prospective contractors submit offers, the contracting officer should advise them of the possible need to revise their accounting procedures to comply with the cost segregation requirements of the Change Order Accounting clause at 52.243-6 . (b) The following categories of direct costs normally are segregable and accountable under the terms of the Change Order Accounting clause: (1) Nonrecurring costs ( e.g., engineering costs and costs of obsolete or reperformed work). (2) Costs of added distinct work caused by the change order ( e.g., new subcontract work, new prototypes, or new retrofit or backfit kits). (3) Costs of recurring work ( e.g., labor and material costs).