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Job Cost Reports – Balance Sheet Set

Construction accounting uses job cost reports to inform management of progress and existing issues with projects.  There are several different sets of reports.  The balance sheet set functions as an overall financial picture for the company.  The balance sheet set informs us of four overall monetary pieces of information:

  1. It basically identifies how much is owed to the company for completed work to date, AND
  2. How much is invested into the respective ongoing projects, AND
  3. How much is owed to suppliers and subcontractors, AND FINALLY
  4. The total amount progress billed to date for active projects.

As the owner or controller for a small construction business the real key to success is your ability to evaluate these four valuable monetary positions quickly and easily.  This article will educate you with understanding all four positions.  In addition, I plan to illustrate the financial flow of construction and end by guiding you through the various analyses of the relationships of all four key pieces of information.

I will use examples and illustrations. 

Before I begin, you need to understand some basic accounting.  If you are not aware of the following terms or concepts, please first read the corresponding article for a clearer understanding or as a refresher before continuing with this particular article.

  • Project ReportsIn introduction to job costing reports; identifies the three distinct sets of report groups including the balance sheet set; this article is the 2nd article in this series.
  • Balance Sheeta basic financial statement identifying all assets on one half of the report and all liabilities and equity with the other half.
  • CIP Accountsa control account that basically accumulates the entire costs associated with all active jobs (projects); since the account is a control account it is easy to break out the accumulated sum into the respective jobs.

This is a rather long article but when you are done you will understand how to evaluate your situation related to your construction business.  You will be able to easily set ratios and triggers alerting you to some serious forthcoming financial concerns or get that warm fuzzy that everything is going well.

Before I get into the details of all this; you must first realize that on the balance sheet there are only four accounts that reflect information directly related to construction.  This first section explains these four accounts and their respective impact on cash.

Accounts Used

Technically there are five accounts an owner of a construction company should review regularly to grasp the overall financial picture of business.  These five accounts will provide a true holistic picture of what is going on with production.  Four of the accounts are directly related to the projects whereas the fifth account is cash.  Cash is a function of multiple inputs and overhead expenses so it isn’t necessarily 100% tied to the projects.  However, these four accounts are directly tied to the projects:

Account Receivables – after a customer is invoiced for services and construction rendered to date the customer’s balance is stored in this account. If your business provides other services than just simple construction you may want to create two account receivables accounts.  The first should be ‘Contract Receivables’ and the other can be labeled as either traditional or regular receivables.  So let’s assume you not only build custom homes but you have a maintenance division as well.  I encourage you to have a ‘Contract Receivables’ account and a ‘Maintenance Receivables’ account.  This way you can clearly identify the amount that is owed to you for active project work from regular ongoing work.

Construction in Process – this account reflects the accumulated costs associated with ongoing jobs. These are costs that you have not transferred to the profit and loss statement.  For those of you using percentage of completion method, you typically transfer costs along with the associated progress billings at the end of each accounting cycle (monthly or quarterly).  If you use the completed contract method of accounting, all the costs and project billings are transferred to the profit and loss statement once the project is completed (receives the certificate of occupancy).  Remember, this account is a control account just like receivables and therefore is a single number identifying the aggregate value of all existing and active projects.

Supplier Payables – just like account receivables the contractor should create two separate account payables accounts. The first one are your traditional accounts payables which you can label as ‘Traditional Payables’ or ‘Regular Payables’ for the account identification.  Into this control account are recorded regular payables related to general business operations including rent, office supplies, utilities etc.  The second account payables type of account is your ‘Supplier’ or ‘Project’ payables.  Here, you want to record those costs directly tied to your projects.  The reason for this separation is so that you can clearly distinguish those costs related to construction against those costs related to business operations.

Progress Billings – progress billings are your regular or contractually agreed performance related invoicing. In addition, you should also record your deposits made by your customer for their respective contract.  If you are unsure about this type of an account, I go into detail here.

When you are looking at your balance sheet as a whole, it will look something like this (the four construction based accounts are in Bold Red):

                  XYZ, Construction
                    Balance Sheet
                       12/31/2014
Cash                                                    $50,000
Contract Receivables                         120,000
Maintenance Receivables                      25,000
Construction in Process                     145,000
Prepaid Expenses                                   10,000
Sub-Total Current Assets                                  $350,000
Fixed Assets (Net of Deprec)                             100,000
Other Assets                                                        12,000
Total Assets                                                                   $462,000
Traditional Payables                            $10,000
Project Payables                                  35,000
Accrued Payroll                                     15,000
Line of Credit                                        25,000
Progress Billings                                 120,000
Sub-Total Current Liabilities                               $205,000
Long-Term Debt                                                    55,000
Equity                                                                    65,000
Current Earnings                                                   137,000
Total Liabilities & Equity                                                   $462,000

Now at the beginning of this section I mentioned that there are actually five accounts for project balance sheet set of reports.  The fifth is the cash account.  To understand how these accounts relate to each other it is best to understand the financial flow related to construction work.  The next section covers the flow of money for a contract.  Let’s take a look.

Financial Flow

At the end of the day there is only one account that really matters in business and that is the ‘Cash’ account.  Without cash you are dead in the water to conduct business.  As the owner, you need to constantly monitor cash and make sure more is going to get deposited in the near future.  How do you do this? By simply getting work done it allows you to invoice.  As you invoice the customer the customer pays and you have more cash.  It is a continuous cycle.  So let’s walk through this cycle.

Typically at contract signing the customer pays a deposit which is recorded as a progress billing and the cash account increases.  So your initial balance sheet will look like this:

             XYZ Construction
               Balance Sheet
                    Day 1
Cash                            $50,000
Progress Billings         $50,000

So your next step is to go out and get some work done at the job site.  So you send out your guys and some equipment and at the end of week one they have cleared the lot, you purchased a building permit and the surveyor has marked the lot and the corners for the footing.  Now you pay the guys on Friday afternoon and so what happens with the balance sheet accounts?  Well, the Construction in Process (CIP) account increases by the total value of those services, i.e. the permit, labor, rental of equipment, purchase of gravel, environmental controls, culverts etc.  So for the sake of ease, assume you paid the guys $3,000 for labor and these materials and other costs approached $7,000.  Now what does the balance sheet look like?

            XYZ Construction
                 Balance Sheet
                       Day 8
Cash                            $47,000
CIP                                10,000
Total Assets                              $57,000
Project Payables            $7,000
Progress Billings           50,000
Total Liabilities                         $57,000

Now remember, all of our materials and equipment rental are owed to the vendors.  They have sent us our bills and they are recorded.  Note that the total CIP is only $10,000 which is the total value of the work done on this project to date.  This same process goes on for several more weeks until we hit $125,000 in total CIP completed.  At the same time we paid out to our vendors for bills to date about $22,000 and paid the work crew another $12,000 over this time frame.  Notice I stated the CIP account is $125,000 and the cash account is now down $34,000 related to the amounts we paid vendors and for payroll. 

So now our Project Payables is going to add up to $88,000.  How did you get this value Dave?  Well let’s see how this adds up:

Starting Balance of Project Payables:             $7,000
Add Change in CIP ($125,000 – $10,000)     115,000
Amount of CIP paid to work crew                 (12,000)
Amount Paid to various Vendors                    (22,000)
Ending Balance of Project Payables                           $88,000

Normally the only amounts recorded to this account are the actual bills received and any corresponding payments made to the suppliers.  My illustration is to show you how I came up with the value you’ll see on the balance sheet right now.  So what does our balance sheet look like?

         XYZ Construction
            Balance Sheet
                 Day 38
Cash                            $13,000
CIP                              125,000
Total Assets                              $138,000
Project Payables            $88,000
Progress Billings             50,000
Total Liabilities                         $138,000

Of course you have been working on this project for 38 days now and you are beginning to run out of cash.  Furthermore, the suppliers are calling and most of the subs and material suppliers are small businesses just like yours and they need cash to pay their bills.  You owe $88,000 and only have $13,000 of cash.  Plus your payroll is going to run another $3,000 come Friday.  What do we do?  Well, luckily you wrote a great contract and the contract allows you to bill your customer once the project is 20% complete and you are allowed to progress bill 19% of the entire contract amount.  In this case the contract is worth $625,000 and you can bill 19% or $118,750.  So you issue the invoice.  Now what does our balance sheet look like?

         XYZ Construction
             Balance Sheet
         Day 39 (Beginning)
Cash                            $13,000
Contract Receivables  118,750
CIP                              125,000
Total Assets                              $256,750
Project Payables            $88,000
Progress Billings          168,750
Total Liabilities                         $256,750

Now all five accounts come into play with our project balance sheet.  Notice that progress billings increased by the $118,750 and the receivables went up the same amount.  Ok, to keep this simple, let’s say you have the world’s greatest customer and he pays you on the same day (most often you’ll need a lead time of around two weeks to get your cash once you issue the progress invoice due to banking inspections and progress signatures).  Now what does our balance sheet look like?

          XYZ Construction
            Balance Sheet
           Day 39 (Ending)
Cash                            $131,750
Contract Receivables       – 0 –
CIP                                125,000
Total Assets                                 $256,750
Project Payables             $88,000
Progress Billings            168,750
Total Liabilities                           $256,750

Notice how the assets section’s total value never changed?  We simply received cash for our invoice and the Contract Receivables balance decreased to zero.   Now we have cash to pay our project payables and continue to do more work on the contract.  This same pattern continues right to the end of the contract.  Except now on the last day, we are allowed to invoice the entire balance due on the contract which includes the 4% we agreed not to bill through the first four progress billings.  So let’s see what the balance sheet looks like just before we are paid for the last installment on the contract.

             XYZ Construction
                Balance Sheet
                     Day 200
Cash                            $100,000
Contract Receivables    100,000
CIP                                425,000
Total Assets                               $625,000
Project Payables            $-0-
Progress Billings          625,000
Total Liabilities                          $625,000

Immediately two lines of information should jump out at you and raise your eyes.  The first is the contract receivable value of $100,000.  Every one of you are thinking, ‘Well, this should be a progress billing of 20% since it is the final progress billing plus the 4% we were not allowed to invoice throughout the contract’ (remember we get to only invoice 19% of each 20% progress invoice therefore the last invoice is for the full 20% and four 1% incremental amounts, thus 24%).  So why isn’t our progress invoice equal to 24% of the contract amount of $625,000 which equals $150,000?  Well, remember at the signing of the contract the customer made a deposit of $50,000?  Well, the contract states that the $50,000 is applied to the final invoice.  Therefore, the final invoice is $150,000 less $50,000 deposit, therefore the final amount owed to us is only $100,000.

The second line item that each of you are raising your eyebrows on is the CIP account.  Why is it only $425,000 and not $625,000?  OK, let’s remember what is included in this account.  It basically records all the costs (actual costs of construction) for the project.  It doesn’t record the profit you earn on the project!  This is a key to success.

Key Business Principle

Key Business Principle

The CIP account only records the actual costs of construction.  These are the direct costs of labor (including the matching payroll taxes), materials, subcontractors, equipment usage, permits, inspections, engineering certificates, interest on any direct debt for the project and even the port-a-john.  All costs are recorded at the original face value and should not include profit markups.

So if you a wondering and I’m sure you are, how much is our margin associated with this project?  Answer:  Subtract the CIP value from the Progress Billings value and you get $200,000.  For this project we wanted a 32% margin or a 47% markup.  If you not familiar with the difference between the two terms read:  Difference Between Markup and Margin

Now also notice that the profit is split between the two other asset accounts.  We have the cash in our account of $100,000, no bills are due and the customer owes us $100,000 for the project.  Remember, this is a great customer and they pay us at the end of the day.  So our profit from the project sits in our bank account.  Now we are ready to move the costs and progress billings to the profit and loss statement.  The costs are broken out into the respective functions of materials, labor, subcontractors and other.  Once the values are transferred to the Profit and Loss Statement the P&L has a $200,000 profit and we have $200,000 of cash in our bank account.  So our balance sheet looks like this:

             XYZ Construction
                Balance Sheet
                  Day 201
Cash                            $200,000
Contract Receivables      – 0 –
CIP                                  – 0 –
Total Assets                            $200,000
Project Payables            $-0-
Progress Billings             -0-
Total Liabilities                       $ – 0 –
Current Earnings                     $200,000

Now you understand the flow of the financial information.  I’m going to confuse it a little now.  Traditionally every business has regular bills to pay such as transportation, management payroll, office expenses and so on.  These types of expenses come out the cash account as they are paid.  So the project based balance sheet never really is balanced because often the cash account is used to pay those bills.  So right away when you are reading the project balance sheet reports, don’t expect the balance sheet to balance.  In a typical set of project balance sheet reports, only those accounts associated with active construction are displayed and thus the balance sheet isn’t balanced here; you a simply displaying only those accounts associated with direct construction.  Typical accounts excluded include Fixed Assets, Other Assets, Accrued Payroll, Other Debt items and the Equity accounts.  If you display the entire balance sheet, then YES the balance sheet should be in balance between the two halves.

However, you use this information to determine cash needs and cash outlays for your projects in the aggregate.  In addition by using relational analysis you can evaluate your ability to continue operations or address operational issues as they arise.  The next section is the really good stuff in learning how this is done.

Relational Evaluation and Analysis

Of the five accounts we use for analysis, four are control types of accounts and cash is NOT a control account.  So when you want to understand the breakout of any particular account you can pull reports from your accounting software that will sum up the respective values reported on the balance sheet.  As an example, suppose your Contract Receivables has $390,000 owed to you.  You want to know who owes how much.  You would simply pull an aging report and all the respective customers/jobs are listed with the total amounts due for each and the aggregated total is the value on your balance sheet report.

If you are like most knowledgeable contractors, you know which customers pay on time and who create problems.  To prevent delays in payment, make sure your contracts have a ‘Stop Performance’ clause in them.  If the customer fails to pay on any progress billing within a certain time frame (I generally suggest no more than 14 days) then you have a legal right to stop working on their project.  I suggest charging a reengagement fee of several hundred dollars to get back to work on the project.  This lets the customer know that delays in payment create issues for you and therefore you have to take serious action to prevent additional costs.  Effective and efficient construction requires great planning, lack of cash interrupts planning and therefore the customer should pay for these additional costs.

Similar reports can be generated for the CIP account, the Project Payables and Progress Billings.  My goal here is to teach you some analysis of the four accounts taken in the aggregate and not broken out into summation.  My next article in this series covers these types of reports and how to evaluate them.  Here I want to show you how to evaluate the relationships that exist between the four main accounts.

First up, let’s look at how to evaluate backlog:

Backlog Evaluation

If you look at any financial report for any large contractor they always refer to their backlog of work.  This is critical as it informs the owners of the depth of value outstanding (unperformed work) with your jobs.  Allow me to explain with an example.  Suppose you are a contractor and you traditional complete around $3.5M in work per year over the last three to four years.  You have been growing at about $250,000 per year.  So for the current year your goal is to complete $3.75M in contract work.  To do this, you must perform around $313,000 of work per month.  You know from your experience that you need around six jobs in process at any given time.  It takes a little more than a month to get a contract negotiated and signed.  Therefore the average contract is between $300,000 and $600,000. 

Right now the total value of all contracts signed and on the books is $2,100,000.  If your average margin is 34%, this means costs for these contracts will run 66% of the value.  With this knowledge you can evaluate your backlog.

Step One – take a look at your CIP value.  The CIP value reflects the total actual costs for active projects.  For this example, the accumulated aggregate costs are $539,000.
Step Two – determine the total expected costs for the existing contracts; in this case you simply multiply $2.1M by the 66% expected costs which equals $1,386,000.
Step Three – determine the percentage of completion of the entire project pool; since $539,000 is recorded and the expected costs are $1,386,000 the total completed to date is 39%.
Step Four – determine the dollar value of the backlog in costs; subtract the completed from the expected which is $847,000 of backlog based on costs.
Step Five – step up the costs to the revenue value of incomplete work; divide the backlog of costs by .66 to step up the backlog value for all existing contracts which is $1,283,000.
Step Six – calculate the number of months of outstanding work; divide by $313,000 per month of revenue expected; so $1,283,000 divided by $313,000 which means the business has a little more than four months of work as backlog.

Over time you will begin to generate a sense of the amount of backlog you need to keep the guys and subcontractors at full operational speed.  Four months may seem good but in reality as the jobs get closer to completion they take a longer to complete those final steps as planning becomes more difficult to accomplish certain items.  Think of your punch out lists.  Some of those items require unique talents and these guys don’t drop what they are doing just to tend to your needs.  So it is in your best interest to have more than one half of a year worth of work as a backlog.  So in this guy’s case, he needs to get on the ball and get another contract signed and inserted into the schedule.  This is the value of the CIP account.

There is another perspective in this and that is evaluating the progress on your jobs in regards to earning money.  This is referred to as Progress Evaluation.

Progress Evaluation

Backlog relates to how much physical work is still yet to be completed.  Progress evaluation informs us how much of the entire available pool of contract value has actually been billed to our customers.  Why is this important?  Well to explain this, let’s go to the extreme.  If you bill out 100% of the work and have only completed 60% of the total work; you have a lot more expenses to incur to get this work done.  Furthermore, some customers are going to be irate with you as they’ll want to know why you billed them and yet you haven’t completed the contracts.

Now let’s go to the other extreme.  Suppose you have completed 60% of the total work and have only billed out 30% of the jobs to date.  This means that there is a lot of money owed to you and you haven’t done your paperwork to get it invoice.  This is actually a good situation to be in as this means you are owed some money.  So how do you determine your progress on your projects?  You need four pieces of information.  They are as follows:

  1. Value of CIP – well this is easy as this is a part of the balance sheet report
  2. Total value of all contracts – simply add them up.
  3. Expected margin on your contracts – for most contractors they use the same value for all their contracts
  4. Value of Progress Billings – also simple, it is on the balance sheet report

To determine the progress status follow these steps:

Step One – determine the total expected costs of all the contracts, just as we did in the backlog evaluation above multiply the expected cost percentage by the total value of all contracts to get a value.
Step Two – calculate the percentage of completion of the entire pool of contracts; take the CIP value and divide by the total expected cost value as determined in Step One.
Step Three – calculate the total value of work completed to date in the form of contract value; multiply the total contract value by the percentage of completion as calculated in Step Two.
Step Four – determine the percentage and amount unbilled for existing contracts by deducting the amount Progress Billed to date against amount completed to date in Step Three.

If you have invoiced more to your customers than the amount completed to date, you have a serious problem.  This is not normal!  Your Progress Billings should always be less than the amount you have completed to date as recorded in CIP.  This doesn’t mean the value in the Progress Billings account should be less than CIP, it means that the CIP informs you how much of your contracts you have completed to date and that progress value should be greater than your Progress Billings to date.

Let’s use an actual example.  This contractor has a 37% margin and currently has total contract values of $1,650,000 on his books.  This is his construction balance sheet limited to just the construction based accounts:

          XYZ Construction
             Balance Sheet
                   Date
Cash                            $22,000
Contract Receivables    42,500
CIP                              247,500
Total Assets                              $312,000
Project Payables         $58,000
Progress Billings        210,000
Total Liabilities                        $268,000

Remember, the project report balance sheet is not going to balance!  So don’t freak out here; this is actually a nice situation to be in for the contractor as you’ll soon see.  Let’s determine the progress status:

Step One – expected costs of all contracts is $1,650,000 times a cost ratio of 63% or expected costs of $1,039,500.
Step Two – determine the actual percentage of completion based on actual costs to date; actual costs to date are $247,500 of an expected amount of $1,039,500 or 23.81 percent complete.
Step Three – determine amount of contract value earned to date; multiply the total contract value of $1,650,000 times 23.81 % complete which equals $392,865 completed to date.
Step Four – calculate the amount of the contracts unbilled to date; total progress billings to date are $210,000 and we should be around $392,865 which means we have an unbilled amount of $182,865 or 11.08% of the total contract values.

With this knowledge it would appear that we should invoice one of the contracts or that we have earned the right to invoice one or two of the contracts.  The key to all this is to get cash into the bank account to pay our bills and continue to get more work done.  So if you look at the balance sheet again, you can obviously see that the CIP value is in excess of our Progress Billings; this is a leading indicator that it is soon time to invoice a customer for work completed. 

As a reader of the reports; a novice will interpret this as stated above.  A more sophisticated owner will evaluate the relationship and understand that Progress Billings includes the expected margins from the contracts as you progress.  So it is OK to have Progress Billings greater than CIP as illustrated here:

          XYZ Construction
           Balance Sheet
                 Date
Cash                             $22,000
Contract Receivables   162,500
CIP                               247,500
Total Assets                              $432,000
Project Payables          $58,000
Progress Billings         330,000
Total Liabilities                         $388,000

This is more reasonable and what to expect.  Notice that as in the example above, we are expecting $393k in Progress Billings and have only invoiced to our customers $330k leaving us with $63k of unbilled progress.  What really stands out is the Contract Receivables balance.  This is the more important line item as now we need to concern ourselves with a need for cash.

Cash Inflows

The whole reason we do this is to earn a profit.  To earn a profit you must do volumes of work.  To get work done, you need cash.  Cash is essential in all of this.  So the first step of dealing with cash flow is determining cash inflows otherwise known as sources of cash. 

The sole source of cash for most contractors is the payment made by customers.  When you look at the balance sheet the existing cash account value plus the contract receivables balance is generally your overall cash to work with.  As the contract receivables balance decreases, cash will increase i.e. collecting of cash increases the cash account.  So pull an accounts summary report for contract receivables and review the situation.  The summary report will look something like this:

               XYZ Construction
Contract Receivables Summary Report
                        Date
Project #150107                      $21,250
Project #150202                        17,000
Project #150319                          4,250
Project #150329                      120,000
Total Contract Receivables   $162,500

With this information you can evaluate your customer’s situation.  I would always ask myself the same question, ‘Why would this customer NOT pay his bill?’  Usually the customer fails to do their part in getting the paperwork done at the bank to get a draw or transfer money from their brokerage account to their checking account.  There is always a reason, so let me give you some suggestions to ‘Head them off at the pass’ like in the old John Wayne movies.  I generally use one or several of the following tools to expedite the process:

  1. Forewarn them of an impending invoice several days in advance so they can make arrangements to transfer money or communicate with the bank; do this via e-mail and request confirmation of receipt of the e-mail.
  2. Remind the customer of the terms of the contract in a polite manner. I usually did a specific reminder such as ‘As required in the terms of the contract, specifically Article 7, Section 3(a) all invoices must by paid within 14 calendar days of invoice generation’ with the first invoice and a general reminder with all remaining invoices. The general reminder went something like this: ‘Please pay within 14 days as we agreed in our contract’.
  3. Ask if progress and quality of work is proceeding as they expected. Often the customer uses some form of ‘Quality’ issue to deny payment.  Really good contractors use the Building Code as the compliance tool; if the County Inspector signs off on the work as accomplished then the work falls within compliance.  Any discrepancies should be addressed to the building inspector and not the contractor.  Ask for input every week of the project during your regular customer updates; ask them to document any concerns via e-mail to you so you can address them in advance.
  4. Use a well drafted draw schedule and get signatures for the schedule from the customer and their lender. Typically you only need an acknowledgement signature that the draw schedule is acceptable to the lender.
  5. Get paid via electronic deposits to the corporate account; make sure the customer has the proper routing and accounting number to make a direct deposit and the e-mail notification process. Use your online banking system to confirm receipt of cash. 

If you look at the above summary report and the balance sheet report you immediately realize that you have a high need for cash.  Often the Project Payables is more than the existing cash.  So now you need to evaluate your cash outflows.

Cash Outflows

When you first look at that balance sheet above you will notice that the current cash balance is only $22,000 and the amount owed to suppliers and subs is $58,000.  The business is shy $36,000 and will most likely have to pay the employees on the forthcoming Friday.  So the cash needed is more than available.  Just as in the Contract Receivables situation the owner should pull a payables summary report to determine the exact amount needed over the next few days to make sure construction in progress continues.  I remember communicating with the subs in order to make sure they didn’t stop performing if they didn’t get paid. 

In one particular incident, the trim carpenter called me up and said that the contractor had not paid in two weeks and he was about 2/3rd’s done (a really nice custom home with lots of trim work and custom railings).  Based on our cash situation I knew we would not receive a draw from the house for another two weeks.  So I negotiated with him to pay him a few thousand now and the balance once the draw was complete.  He agreed.

So communication is essential in this industry.  What is more important is that you can see by the dollar values in the respective balance sheet accounts that keeping up with Progress Billings and communicating with the customers to prevent delays in payment is required to have the necessary cash to pay the suppliers and subs. 

Evaluate your cash needs (outflows) against available sources to determine amounts needed in the upcoming week, several weeks and steps you may need to take to expedite receipt of cash.  This is where the next set of reports comes in handy.  The project summation reports is the third article in this series and you may want to read them by going here (Expected release date of July 1, 2015).

The Whole Picture

As the reader of the reports you need to be able to evaluate the situation.  Having the information handy and knowing the total contract values and your margins allows you to analyze the progress of the company.  For cash purposes, look at your available cash, cash sources via the Contract Receivables and then the cash needs.  The total cash sources should ALWAYS exceed your cash needs.  If not then you need to invoice for some work in order to get some cash into the company to satisfy those needs.

For the projects as a whole, compare your CIP to Progress Billings.  I personally prefer that CIP is always more than Progress Billings which provides comfort to me to have some room to generate more progress billings.  Of course the best situation is having very little cash needs in the forms of Project Payables with plenty of cash on hand and Contract Receivables existing to add more cash to the bank account.  In addition having the CIP value greater than Progress Billings is icing on the cake.  But even if the Progress Billings are greater than CIP (this is normal by the way) then it is still OK. 

Evaluate your backlog and progress to date for existing contracts.  As the backlog dwindles, hopefully you have negotiated several potential contracts that can expand the backlog.  The balance sheet report is great overall picture of the construction business status.

I encourage you to look at this report weekly; over time you’ll get the hang of doing quick evaluations and you get it done in about 4 to 5 minutes.  That is how fast and easy this set of reports are to use.

This next section will explain how you generate this information using QuickBooks.

Using QuickBooks to Create Report

To pull this balance sheet report in QuickBooks you are going to generate a custom report.  Go to reports and select ‘Company and Financial’.  Then choose your balance sheet standard report.  Allow it to open.  Once open, click on Customize the report in the upper left corner.

Click on your filters tab and select account, click on the little down arrow on accounts and choose ‘Multiple Accounts’.  Here, only select the five accounts as described above.  Now choose the Header/Footer tab and change the name of the report to Project Based Balance Sheet.  Now choose Fonts and Numbers tab.  In the section over on the right in the ‘Show all Numbers’ check the ‘Without Cents’ box.  You don’t need to see the cents for each line item. 

Now look at the report.  Does it appear as I illustrated above?  Now hit the Memorize button at the top of the report and give it a name ‘Project Based Balance Sheet’.  Save the report in your Company reports.  Now when you want to see this report, go to Company reports and select this report and change the date to the date that is needed by you.

That is it; it should work well.

From here you can also create the summary report for Contract Receivables and for Project Payables.  I generally prefer the Summary Aging report over the traditional summary version.  Take a look at both and you’ll see the value.

Summary

Project accounting reports are developed in three distinct groups.  The first group referred to as the balance sheet set is used to evaluate the financial picture as a whole for the contractor.  With five accounts on the report and knowledge of your total aggregate dollar value of active contracts and the margin you expect you can get the following information:

  • Backlog of work and a time  frame to completion for existing work; the backlog value will allow you to determine the need to accelerate any existing negotiations for future contracts.
  • Progress evaluation of your current unbilled work and the relationship between the CIP and Progress Billings.
  • Cash Inflows – an analysis via the Contract Receivables of how much cash is anticipated over different time frames.
  • Cash Outflows – by using the Project Payables account the owner can determine the need for cash over the next week and several weeks.
  • Overall Financial Picture – by understanding the work flow as it pertains to the balance sheet the owner can evaluate his overall status related to existing contracts and use good judgement in acquiring more work or higher quality work.

The report is easily customized in QuickBooks and with just this information the owner can quickly ascertain their respective situation.   Act on Knowledge.

If you have any comments or questions, e-mail me at dave (insert the usual ‘at’ symbol) businessecon.org.  I would love to hear from you.  If interested in my help as an accountant or consultant, contact me through the ‘My Services’ page in the footer. 

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About David J Hoare (389 Articles)
I spent 12 Years as a Certified Public Accountant, Over 20 Years of Practice in Accounting and Consulting, Controller in Management of Closely Held Operations, Masters of Science in Accounting, Prepared over 1,000 Business Tax Returns and Hundreds of Individual Returns