Best Format for the Construction Profit and Loss Statement
As a construction company owner, you need a profit and loss statement that conveys information in a format that will identify how much you are truly making as a profit. The best format is a construction profit and loss statement identifying contract revenues, direct costs, indirect costs and the overhead expenses. This format most closely matches the estimating style of most small construction companies.
At the end of the day, it is about the profit you make with your company. This format will point out where the problem is located and where the best performance occurs. When looking at a P&L, a reader wants to quickly identify issues and concerns and get them addressed. If you use this format along with the project accounting reports illustrated in other articles, not only will you quickly discover problems, but you can actually pin point the underlying issues and get them resolved. This will add thousands of dollars to your bottom line. As you read this article, remember you are trying to improve that bottom line, this format is absolutely the best tool to achieve that goal.
The construction profit and loss statement has four major sections: revenue, direct costs, indirect costs and overhead. Each section is described below and the profit and loss statement is illustrated as each section is described.
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Revenues
For most small construction based businesses, there are two methods to recognize revenue. The first is the percentage of completion method and the second is called the completed contract method. Both are acceptable methods and each has their own respective advantages.
Percentage of Completion Method: As the contract progresses, the contractor recognizes the revenue as he completes certain milestones. The best correlating example is the same method used to request draws from the bank or owner for completing certain steps along the construction path. See Construction Draw Schedule for more information about construction draw schedules. If the project is 20% complete, then the contractor recognizes 20% of the revenue for the house or project and then recognizes 20% of the associated costs. This is a bit more difficult to manage as it requires a more sophisticated form of accounting and a higher level accountant to compile the dollar values associated with this method. It customarily is used by much larger contractors, those that generate more than $10,000,000 a year in sales or perform government contract work.
Completed Contract Method: This method recognizes all the revenue and the associated costs of the completed project once the certificate of occupancy is issued. This method posts the revenue and direct costs to the profit and loss statement at the termination of the project. In the interim, costs are posted to the balance sheet as Work in Process and cash received for draws in the liability section of the balance sheet as Project Draws. Upon completion the draws and the full contract amount is posted to the revenues section. The Work in Process for this project is posted to the direct costs section of the Profit and Loss (discussed below).
This method keeps the accounting simple and there is no need to hire or retain highly educated staff to perform accounting duties. This is really the best method for really small construction contractors (those with less than $10M/Yr in contract revenues).
Based on the information above, your profit and loss statement should match the following format for revenues:
CAN-DO CONSTRUCTION
Profit and Loss Statement
Period Ending MM/DD/YYYY
Completed Contract Method or Percentage of Completion Method
Contract Revenues $ZZZ,ZZZ
Change Orders/Allowances/Addendums ZZ,ZZZ
Interest Earned on Contract Revenues ZZZ
Total Construction Revenues $ZZZ,ZZZ
Direct Costs
Direct costs are those costs that can be directly identified to a project. See A Model of Excellence and Use Phase Accounting for more information about direct costs. There are five subsections of direct costs, they are as follows:
- Land – only if a lot is purchased by the contractor for the project
- Materials – self-explanatory and directly assignable to a particular project
- Sub-Contractors – to make this easier for accounting purposes, have the sub send a separate invoice for each project he works
- Labor – in-house labor assigned to a project
- Other – closing costs, permits, engineering work, architectural work, surveying, interest charges from the bank, direct insurance assignable to the project, bonds, and other
It is important to understand that these are costs that were directly incurred because of this project. Be sure to include the gas for the generator used on site, the port a john, and re-inspection fees in the ‘other’ line. Any cost that can be directly traced to a particular project should be included in direct costs.
With the above information, your profit and loss statement should look similar to this:
CAN-DO CONSTRUCTION
Profit and Loss Statement
Period Ending MM/DD/YYYY
Completed Contract Method or Percentage of Completion Method
Contract Revenues $ZZZ,ZZZ
Change Orders/Allowances/Addendums ZZ,ZZZ
Interest Earned on Contract Revenues ZZZ
Total Construction Revenues ZZZ,ZZZ
Direct Costs:
Land ZZ,ZZZ
Materials ZZZ,ZZZ
Subs ZZZ,ZZZ
Labor ZZ,ZZZ
Other ZZ,ZZZ
Sub-Total Direct Costs ZZZ,ZZZ
Direct Profit $ZZ,ZZZ
Notice that direct profit is total revenues less direct costs. This should be similar to what your estimating software has as the profit on the project. If they are not closely aligned, then you should identify the discrepancies in order to make changes and improve the company’s bottom line.
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Indirect Costs
This is one of the more difficult areas for most contractors to understand. Simply put, those costs incurred to get more than one project done, i.e. costs that directly benefit projects but are not office related, are considered indirect costs. The following identify and describe the respective types of costs:
- Management – your personal payroll and the payroll of project managers if they manage more than one project at a time are included here. If the project manager’s time can be directly assignable to the project, then his payroll costs should be in the labor section of direct costs.
- Payroll Taxes and Benefits – those taxes and benefits directly associated with the labor in the field.
- Transportation – all costs associated with the vehicles and trucks broken out into sub accounts as follows:
- Depreciation – see Depreciation – This is Weird Accounting for more information about depreciation
- Interest on the note for the vehicles
- Fuel
- Repairs and Maintenance
- Taxes and Licenses – annual registration, decals, inspection etc.
- Insurance
- Communications – cell phones, internet, regular phone lines
- Equipment – the depreciation and the direct costs of the equipment used in the field; rental equipment is included in other direct costs because that piece should be easily identifiable to a project.
- Insurance – workman’s compensation, general liability, bonds (general bonds, if the bond is directly associated with a project it should be in the other direct costs above)
- Tooling & Supplies – general tools purchased for the company and general supplies that are used several times over in different projects. Examples include the environmental barriers, signs, stakes, yard tools etc.
The key difference between direct and indirect is the sharing element. If the cost cannot be directly associated with a single project, then it is shared among two or more projects and therefore is considered an indirect cost.
Now the profit and loss statement will resemble the following after indirect costs:
CAN-DO CONSTRUCTION
Profit and Loss Statement
Period Ending MM/DD/YYYY
Completed Contract Method or Percentage of Completion Method
Contract Revenues $ZZZ,ZZZ
Change Orders/Allowances/Addendums ZZ,ZZZ
Interest Earned on Contract Revenues ZZZ
Total Construction Revenues ZZZ,ZZZ
Direct Costs:
Land ZZ,ZZZ
Materials ZZZ,ZZZ
Subs ZZZ,ZZZ
Labor ZZ,ZZZ
Other ZZ,ZZZ
Sub-Total Direct Costs ZZZ,ZZZ
Direct Profit $ ZZ,ZZZ
Indirect Costs:
Management ZZ,ZZZ
Payroll Taxes and Benefits Z,ZZZ
Transportation Z,ZZZ
Communications Z,ZZZ
Equipment ZZZ
Insurance (WC, General, Bonds) Z,ZZZ
Tooling & Supplies ZZZ
Sub-Total Indirect Costs ZZ,ZZZ
Gross Profit $ZZ,ZZZ
Overhead
These costs are general in nature and usual involve those costs associated with the front office. These include the payroll associated with the office, secretary, bookkeeper, cleaning staff etc. Other costs include rent, utilities at the office, professional services such as the lawyer (not contract related) or CPA, banking fees, office supplies, postage, and marketing.
Some contractors will include marketing in indirect costs. This is strictly up to you, however which way you decide, be consistent from accounting period to accounting period in the where this expense is reported. The key is to be able to compare apples to apples.
The final report should identify the four major sections and the associated costs. The bottom line reports the final profit earned from the operations of the company. The final report will look similar to the following example:
CAN-DO CONSTRUCTION
Profit and Loss Statement
Period Ending MM/DD/YYYY
Completed Contract Method or Percentage of Completion Method
Contract Revenues $ZZZ,ZZZ
Change Orders/Allowances/Addendums ZZ,ZZZ
Interest Earned on Contract Revenues ZZZ
Total Construction Revenues ZZZ,ZZZ
Direct Costs:
Land ZZ,ZZZ
Materials ZZZ,ZZZ
Subs ZZZ,ZZZ
Labor ZZ,ZZZ
Other ZZ,ZZZ
Sub-Total Direct Costs ZZZ,ZZZ
Direct Profit $ ZZ,ZZZ
Indirect Costs:
Management ZZ,ZZZ
Payroll Taxes and Benefits Z,ZZZ
Transportation Z,ZZZ
Communications Z,ZZZ
Equipment ZZZ
Insurance (WC, General, Bonds) Z,ZZZ
Tooling & Supplies ZZZ
Sub-Total Indirect Costs ZZ,ZZZ
Gross Profit ZZ,ZZZ
Overhead:
Rent (office rent, storage etc.) Z,ZZZ
Office Staff Payroll & Taxes Z,ZZZ
Office Operations (Supplies/Postage/Printing) ZZZ
Marketing Z,ZZZ
Professional ZZZ
Utilities ZZZ
Banking Z
Other ZZ
Sub-Total Overhead Z,ZZZ
Net Profit $Z,ZZZ
Note the four major sections, revenues, direct costs, indirect costs, and overhead. By recognizing the costs in the correct section the small business contractor can identify any issue with one of the sections. From there, he can make any correction or find the cost driver that is preventing the type of profit he desires. The key is to generate a feedback loop by having a good accounting input system. This will be explained in a future article. Act on Knowledge.