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For large construction businesses, the accounting function lies in the hands of an experienced controller or CFO who can produce accurate financial statements on a monthly basis. As a result, there are no surprises at year-end or difficult conversations with the bonding company because the figures reported throughout the year have changed. However, this may not necessarily be the case for small to mid-sized construction companies. 

For example, after a firm closes its fiscal year, the business is showing a 5 percent bottom line profit margin. And then the auditors arrive. Adjustments are made, balances are confirmed, and the work in process schedule is tweaked. All of a sudden, that 5 percent margin becomes a 1 percent margin. How did this happen? More importantly, how can it be prevented from happening again? 

The answer is easy: maintenance of an accurate contract schedule. 

This schedule should be a part of every monthly staff meeting, allowing team members to discuss where each contract is, what costs have been incurred and what is expected in order to complete. The key word here is “accurate.” Construction business leaders should ask four questions when reviewing a contract schedule for accuracy. 

1. Have All Indirect Costs Been Allocated and Accounted for on The Schedule? 
Indirect contract costs include costs such as running the shop, normal repairs and maintenance of equipment that is not specific to one job, or even the cost of the company’s liability insurance. Sophisticated job costing software should account for and allocate all of these costs; however, not every company utilizes or can afford this type of software. 

In these instances, a method should be developed to ensure these costs are captured and allocated to each job. The allocation method utilized could be based on direct labor for each job, equipment hours for each job or even a simple total direct cost allocation method. Regardless, the allocation method should ensure all indirect costs are properly allocated and accounted for. 

2. Are the Estimated Costs to Complete Up to Date? 
The estimated cost to complete each job is the most important number on the schedule. This number can significantly change the bottom line profit or loss. If an aggressive number is utilized, the firm will recognize too much profit and experience job fade.

Time and attention should be given to this number to ensure the estimate reflects current projections and includes all costs to complete the job, including an estimate of the indirect costs to complete the job. 

3. Are Any Jobs in Process Showing an Estimated Loss? 
If the answer is yes, the next question becomes: Have all the losses been recognized? If a job is projecting a loss, the percentage of completion accounting method requires a company to recognize the entire loss in the period the estimated loss is identified. This recognition can significantly impact the company’s bottom line. 

4. Does the Profit Margin Seem Inappropriate? 
The profit margin reflected for small contracts and time and material jobs is a good indicator of whether the schedule has captured all of the company’s revenue and costs. If the profit margin on the small contracts and any time and material jobs seems inaccurate, this could be a red flag requiring further investigation. 

Once any inaccuracies are identified, corrections can be addressed and more accurate financial reporting will follow. 

Kate Ward is a partner at Kerber, Eck & Braeckel LLP, Springfield, Ill. For more information, call (217) 789- 0960 or email katew@kebcpa.com


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