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, such as overhead, budgeting, and talent, owners and project managers can improve cash flow and bid smarter on fixed price contracts.
Overhead and Budgeting
While profits (or lack thereof) are directly driven by job costs, don’t forget to factor in overhead:
- Office payroll and benefits
- Building rent or mortgage
- Equipment and supplies
- Professional services
- Professional dues
- Meals and lodging
- Shipping and postage
- Cell plans
Every dollar of overhead reduces your ability to compete and bleeds money from profit margins. Make the time and effort to examine every overhead line item on the profit and loss statement. Look for opportunities to reduce overhead. If it has been 2-3 years since you last shopped the item, whether it is property and casualty insurance, a cell phone plan or your electrical provider, do so. You may be surprised at the amount of cost you can drive out of your overhead.
Finally, make the time and effort to develop a comprehensive budget incorporating your understanding of your job cost drivers, your targeted sales numbers and your refined overhead. Develop the discipline to compare your actual performance to the budget on a monthly basis, if for no other reason than to refine your understanding as to the cost drivers within your business.
Talent and Risk
This brings me to your pool of talent. FMI Quarterly noted in a 2016 survey of construction firm owners that lack of experienced field supervision and project schedules posed some of the top risks to their bottom line. This points to the critical role that the right talent plays in a company’s success. And, as we know, skilled talent is very hard to come by in this field.
Traditionally, many construction companies have had a busy season and a slow season in which workers are furloughed and start collecting unemployment. Post-Recession, companies have downsized their primary workforce and brought on temporary labor through staffing agencies as needed. Others have changed their business model to eliminate the slow season and keep employees busy year-round.
Whichever hiring and retention option you choose, the main idea is to right size your workforce and make sure you are hiring the right people in the first place. A temp-to-hire option through a staffing agency can reduce the risk of hiring the wrong person who costs money in training and time but ends up quitting a few weeks or months later. The more you can stabilize and train a strong pool of talent, the less likely you are to outlay unemployment, worker’s compensation or other employee costs.
Over the past decade, the construction industry has seen even the biggest and longest-running construction companies fail. A regular study of contractors by risk management consultancy FMI concluded that getting too much work, too fast, with inadequate resources led to inadequate capitalization. Often, the hubris within leadership led to the company’s downfall, assuming they were too big to fail. Imagine the risks, then, to a small operation.
A dedicated CPA can perform an analysis of past jobs and predict the likelihood of profitability on future jobs. If your company is regularly averaging a negative margin, for example, it won’t be long before your company risks its bonding capacity — or worse — is headed toward bankruptcy. Before taking that risk, get to the bottom of your true costs so your company can thrive in a competitive fixed-price environment.
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.