Construction companies experience unique accounting structures due to expenses driving revenue as projects move through various stages of completion. By managing a variety of costs, maintaining safety for employees and hiring the right people, owners and project managers can improve cash flow and bid smarter on fixed price contracts.
In my role as the fractional CFO/controller for a rapidly growing construction company earlier in my career, I experienced the tough reality of out-of-control costs in a fixed contract price environment. Costs were out of control partially because the company’s rapid growth was surreptitiously changing the company’s underlying cost structure and partially because economic conditions had changed. The net result was a squeeze on profit margins and cash flows that placed the company in danger of marching down the primrose path.
The squeeze resulted in a snowball effect on cash management. The accelerated growth had outpaced the company’s ability to increase the bank line of credit capacity, which meant that any increased demand for cash had to be satisfied through cash flow generated by the jobs. We had to navigate complicated lien rules in order to collect receivables. We had to re-evaluate billing policies and increase the company’s overbilled positions. When bidding new work, we had to be disciplined in the size of projects the company chased or risk the company’s bonding capacity. Meanwhile, we saw general liability and worker’s compensation insurance rate increases due to changes in the market. We could only hope that materials costs would not follow suit.
Once it became clear that we were dealing with something more systemic than a bad job or two, the owner and I went to work understanding what had happened and trying to correct the underlying issues. Within two years, the company accomplished a true turnaround. Starting with a company that was losing $400,000 a year, we ended up with a company that produced a gross profit margin of more than 15 percent annually.
Just one of the interesting lessons learned through this experience was that few construction companies, if any, spend the necessary time each year to comb through their budgets and question the true costs of each line item. Whether it’s the company cell phone plan or fuel and maintenance costs for fleet vehicles, no budget item is too small to scrutinize for long-term savings to the bottom line.
If your company exists in a fixed-price contract environment — as most construction companies do — expenses drive revenue. Especially with a Post-Recession mindset, profitable construction companies must have the discipline to look at their work–in-process reports every month and identify any expenses that are trending above budget.
There are, of course, other factors that can impact cash flow and profits in any given year. Let’s look at the key drivers for real cost savings in the life of a construction company — both short-term and long-term.
Cornwell Jackson’s Tax team can provide guidance on reigning in costs by reviewing your profit and loss statements, work in process and general accounting ledgers. Contact our team with your questions.
Scott Allen, CPA, joined Cornwell Jackson as a Tax Partner in 2016, bringing his expertise in the Construction and Oil and Gas industries and 25 years of experience in the accounting field. As the Partner in Charge of the Tax practice at Cornwell Jackson, Scott provides proactive tax planning and tax compliance to all Cornwell Jackson tax clients. Contact him at Scott.Allen@cornwelljackson.com or 972-202-8032.