Nobody wants to talk about a loser job - and other tips about closing month-end books for Commercial Contractors

This article focuses on closing month-end books for commercial contractors.?By that I mean, contractors that typically have jobs that last longer than six months or so.?Let’s approach this in a few parts. I’ll get the easy stuff out of the way first. And as you’ll see when you read through this article, the deep dive into your WIP is a pivotal step in your month-end close.?

1.?????Why is it necessary to close the books and produce a financial statement and WIP??

2.?????What is the difference in the steps of closing the books for a construction company versus other industries??

3.?????What are the steps to doing this??

4.?????Finally, a deeper dive into your WIP and a final draft of your financial statement.

Why is it necessary to close the books and produce a financial statement and WIP??

Once a construction company gets to be a certain size – and that size is different for each contractor and generally depends on the number and size of jobs, and the number of employees - the Owner/CEO/President needs to see a timely financial statement and Work-in-Progress report to quantify the month’s results.?The timelier, the better.?This enables him/her to react to the results and make an impact on future results.

What is the difference in the steps of closing the books for a construction company versus other industries??

Every industry has its key areas that drive profitability that if not booked correctly can mislead the reader of the financial statements.?For manufacturing, it is the inventory value and how it is expensed out to the income statement. For a SaaS company, it could be the revenue recognition of sales. And for construction, it’s the WIP!?The key to a contractor’s financial reporting is how accurately they recognize revenue.?Revenue recognition comes from the accurate reporting of their various contracts (contract value and estimated cost).?More on this in a bit.

What are the Steps?

There are many articles that provide a great checklist of the important steps to follow to close the books, like this, as well as other great construction industry sites to use as a resource, like this.

Alas, not all steps have an equal weight.

A checklist is great, but there’s a lot more to consider.?

Let’s dive deeper into the steps we should take to produce an accurate financial statement:

General Accounting Stuff:

• Bank and Credit Card Reconciliations.
• Close A/P, A/R, Subcontractor Payable, and Inventory (if any).
• Accrue and close Payroll and Payroll related accounts.
• Journal Entries – depreciation entries, amortization of insurance, PTO accrual, current/long term liability adjusting entries, sales/use tax accrual, etc.

Work-in-Progress Round 1:

• Update the cost to date – simple.
• Update the billed to date – simple, but be sure it includes the accrued retention as well.
• Update approved contract amounts – increase/decrease for approved change orders and deductions.
• Update any pending change orders / extras.

Many jobs may have a lot of pending change orders that work has / is being performed on and a “conservative / realistic” value of these should be included in a separate column on your WIP and then have the estimated total contract carried as well.

• Update the estimated cost.

This may or may not have changed.?If changed, be sure to update it.?If the cost to date has exceeded the prior period’s estimate total cost, then do research to find out what the new estimated cost is and input accordingly.

• Plug the over/under billings, “Costs in Excess of Billings” / “Billings in Excess of Cost,” values into the balance sheet and make the offsetting entry to the income statement.
• Print your financial and WIP.

Work-in-Progress Round 2:

• Analyze Underbillings:?I have often said:

If I get one KPI (Key Performance Indicator), it is underbillings.?

Two main categories with one in-between:

o??“Not Bad” Category: Look at the jobs that are over 20% complete and have a significant underbilling.?Is there a “not bad” reason for it??There could be. Some examples might be if:

• Someone forgot to get the billing in.
• The cut-off date for the billing is the middle of the month and the job will always look underbilled at month-end.
• The schedule of values was not front loaded and the billing is behind the actual work.
• There was a large purchase coded to the job that cannot be billed for yet.
• If a lot more work was completed toward the end of the month that wasn’t forecasted in our billing.

o??“Not Sure” Category: Are we incurring a lot of costs doing change order work that has not been approved??If so, that is why we capture the significant change orders when we put our WIP together so we can also increase the estimated cost for the change order work being performed to match.

o??“Not Good” Category: If none of the above issues come into play, then why are we behind in our billing??Why are the percentage of costs coming in higher??Typically three areas to look at:

• Labor – if we are a labor-intensive contractor the difference in a good job versus a bad job is usually labor hours.
• Equipment - if we are an equipment intensive contractor the difference in a good job versus a bad job can also be equipment cost and hours
• Material - material is typically within 1?% - 2% either way, until it’s not.?When it’s not, you usually have a supplier increase issue or a bust in your estimate.?Neither is good.

Abnormal Jobs:?Do a bit of investigation into the jobs that have abnormally high gross profit margins.

o??Find out the reason for the high margin. If the abnormally high GP margin job is also underbilled, this is a flag that something is amiss.

o??Research the job that is said to be done, but has a large overbilling still on it; this could mean that there are costs that were coded to the wrong job or that someone is holding onto some invoices that still need to be coded to the job. Be sure to close the loop on this before closing the job out.

Now - go to work:?Armed with this information, go meet with estimators, project managers, superintendents, foremen, engineering, contracting managers – basically, whomever can help solve the puzzle.?

Remember, nobody wants to talk about a loser job so your first clue that you have some problems to uncover is when nobody wants to talk about the job.?

Once you get your updated information, update your numbers accordingly and make your journal entries and rerun your financial statement.

I hope this helps give some guidance to the month-end close.?All the money is in the jobs.?Getting the revenue recognition as correct as possible is the biggest driver to an producing an accurate financial statement.