At all times a contractor should know how much has been spent on a project and its source of funding. To provide this information, a simple report is generated called the Open Job Cost Status Report. Its basic presentation format is like this:
. Job ID Costs of Construction Project Notes Customer Deposits/Payments Net Amount Funded by Contractor
. 171218 $781,209 $540,000 $50,000 $191,209
. 180113 516,737 380,000 76,205 60,532
. 180206 691,319 510,000 75,000 106,319
. … 7,893,287 6,957,600 289,455 646,232
. $9,882,552 $8,387,600 $490,660 $1,004,292
This report provides a lot of information to the contractor/owner of a construction business. Let’s explore the valuable information.
The report is a simple spreadsheet format that lists each job in the first column. The second column comes from the construction in process or WIP account on the balance sheet. Its cumulative value must match the ledger balance for this account. The lead accountant reconciles this account to this report regularly (weekly) to ensure proper entry of source data. The costs in this column are actual costs (not marked up) incurred for the respective project to date.
Since most projects are capitalized with some form of financing or draws, the third column represents the the value of draws taken to date for the respective project. In addition to this, the customer often makes payments on their own or due to contractual requirements. Most notable is of course their deposit when they sign their contract. Other customer payments may include change order payments, additional contractual payments or option fees paid when signing a letter of intent for the respective project.
The final column lets the contractor know how much of the company’s money is invested in this contract. In almost every project, the contractor should have his own money invested. It is rare that the contractor is upside down whereby he has been advanced payments and has less costs into the project than the advanced monies (project notes/customer payments).
All three financial columns are sourced from their corresponding ledger account on the balance sheet. Immediately, this tells an outside reader that this particular contractor is using the completed contract method of accounting for projects and not the percentage of completion method. Since the ledger accounts are control accounts, the values in the accounts are easily determined through a subsidiary ledger which lists the respective value in that account for that particular project.
An important element of the above report is that it does NOT identify any potential profit related to the project. It merely states how much of the contractor’s own money is in the respective project. The contractor may source his own money from his subcontractors or suppliers via accounts payable, but in general the net amount reflects the amounts the contractor is at risk for related to that particular project.
The net amount also helps the contractor to know if a potential source of cash is available, i.e. another draw on the respective project. Since most bank notes allow a contractor to draw funds at certain physical points of construction, it is easy to identify potential sources. Look at project ID #171218. The contractor has $191,209 of his own money in this project which then tells him that there are a lot of costs incurred above and beyond amounts borrowed and therefore most likely a lot of progress for that project which will allow for a draw on the note. It is assumed the note has enough open or unused available funds to request a draw.
A good contractor gets an updated report weekly and reviews the report for progress and status. Any questions can be addressed by simply reviewing the activity for that particular project during the prior week.
One last comment about the above report. This report can be easily prepared with QuickBooks by utilizing the custom reports feature and selecting the summary report function. Over in filters, utilize filters to select certain balance sheet accounts and then via the display tab, ensure the columns display is set to accounts and rows are set to customer ID’s.
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 services as an accountant/consultant; click on ‘My Services‘ in the footer of this article.