Fall 08 - Managing the Closeout Process

Hindsight Is Always 20/20

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.

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.

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Construction Advisor is produced quarterly by Bober Markey Fedorovich’s Construction Services Team. For
questions about the services we provide, please contact our team leader, Dale A. Ruther CPA, CIT, CDS at (330) 762-9785 or by email.

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