| Fall 2008 |
Construction Advisor
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Hindsight Is 20/20
Managing the Closeout Process
As a construction job draws to a close, a contractor's interest can be
diverted elsewhere. After all, there's other work to be done, and supervisors
are needed on other sites.
But the last stages of a job require management attention, too. Most
importantly, when a job ends, a construction company should study its own
performance and produce a closed-job report. Such a report can establish a
formal end to a contract and provide the contractor with valuable lessons going
forward.
How Profitable Was It - and Why?
A closed-job report gives you the opportunity to look back on a
percentage-of-completion job to find out how profitable it was and why.
By knowing the "why," you can develop more precise and accurate bids on future
jobs and, over time, focus on more profitable contracts.
Some of the functions a closed-job report can perform include:
- Declaring the job complete. Closeout marks the end of a contractual
relationship between contractor and owner. When an understanding is in place
between site supervisors and accounting personnel that no more work will be
done on a job, it's reasonable to declare it over.
But processes must also be in place to modify the report for post-job
requirements. Warranty work, for example, can come up long after a job is
complete. Various accounting software systems let contractors include
warranty-work costs in a completed job, or accumulate such costs in a separate
account.
- Accounting for all change orders. Contractors should be satisfied
that the costs and billings for all change orders have been added to those of
the job itself. This may involve choices: When should orders be recorded?
Should all revenue be recorded or just revenue up to the cost of the order?
- Accounting for retainage. Has retainage been billed and recorded?
Different techniques are used to track billed and unbilled retainages, but the
process must be consistent to ensure that the accounting for such transactions
is correct. And closing a job means following up on your billings, too. Have
you been paid?
- Opening a window on profit fade. Profit fade occurs when the gross
profit percentage is reasonable or even high in the early stages of the job,
but becomes lower and lower as time goes on due to revisions in estimates of
job costs.
Contractors can analyze profit fade on the basis of completed closed-job
reports by sorting jobs according to estimator, project manager, job
supervisor, etc. If trends appear, they can be factored into the bidding
process.
- Including post-completion job audits to review budget variances and
overruns. Actual figures collected over several jobs will help put future
cost estimates and bids on firmer footing.
Point of Substantial Completion Is Critical
It's also critical to determine substantial completion, because that
calculation dictates when profit is recognized.
Generally, substantial completion should be declared when remaining costs and
risks are insignificant. A consistent approach is important in order to avoid
the temptation to recognize completion on some contracts earlier than others.
And the method used to determine substantial completion should be disclosed in
accounting documents.
Detailed closed-job reports can help your company bid more effectively. Our
firm can help you put them together.
Construction Advisor is produced quarterly by Bober, Markey, Fedorovich & Company's Construction Services Team.
For questions or to obtain additional information about the services we provide to construction companies and contractors, please call or email our team leader, Dale A. Ruther, CPA, CIT at (330) 762-9785 or
dale@bobermarkey.com.
Unless expressly stated otherwise, any U.S. tax advice contained in this communication (including attachments) is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
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