Minimum Bottom Line Profit Should Average 9.4%!
For Trades & Subcontractors, at Least 11%
After Income Taxes Are Paid!
The Open Job Cost Status Report identifies a project’s actual costs of construction, amounts borrowed or financed, and any customer payments made to date. The net result is the contractor’s net investment into the respective project.
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.
Value Investing
Do you want to learn how to get returns like this?
Then learn about Value Investing. Value investing in the simplest of terms means to buy low and sell high. Value investing is defined as a systematic process of buying high quality stock at an undervalued market price quantified by intrinsic value and justified via financial analysis; then selling the stock in a timely manner upon market price recovery.
There are four key principles used with value investing. Each is required. They are:
- Risk Reduction – Buy only high quality stocks;
- Intrinsic Value – The underlying assets and operations are of good quality and performance;
- Financial Analysis – Use core financial information, business ratios and key performance indicators to create a high level of confidence that recovery is just a matter of time;
- Patience – Allow time to work for the investor.
If you are interested in learning more, go to the Membership Program page under Value Investing section in the header above.
Join the value investing club and learn about value investing and how you can easily acquire similar results with your investment fund. Upon joining, you’ll receive the book Value Investing with Business Ratios, a reference guide used with all the decision models you build. Each member goes through three distinct phases:
- Education – Introduction to value investing along with terminology used are explained. Key principles of value investing are covered via a series of lessons and tutorials.
- Development – Members are taught how pools of investments are developed by first learning about financial metrics and how to read financial statements. The member then uses existing models to grasp the core understanding of developing buy/sell triggers for high quality stocks.
- Sophistication – Most members reach this phase of understanding after about six months. Many members create their own pools of investments and share with others their knowledge. Members are introduced to more sophisticated types of investments and how to use them to reduce risk and improve, via leverage, overall returns for their value investment pools.
Each week, you receive an e-mail with a full update on the pools. Follow along as the Investment Fund grows. Start investing with confidence from what you learn. Create your own fund and over time, accumulate wealth. Joining entitles you to the following:
- Lessons about value investing and the principles involved;
- Free webinars from the author following up the lessons;
- Charts, graphs, tutorials, templates and resources to use when you create your own pool;
- Access to existing pools and their respective data models along with buy/sell triggers;
- Follow along with the investment fund and its weekly updates;
- White papers addressing financial principles and proper interpretation methods; AND
- Some simple good advice.
