your construction company have an annual budget? Owning and operating a
construction business is not easy and requires expertise in your craft, as well
as in-depth knowledge of your company’s finances. According to data from
IBISWorld reports, one of the top success factors for a construction company is
effective cost controls and budgeting.
- Supports planning and financial goals
- Assists with managing your money
- Helps keep costs under control
- Aids with the decision-making process
Here are six tips to help you create and maintain a budget for your construction business:
1. Develop or refine your business plan.
Your budget is a financial representation
of your business plan. Creating a budget should not be attempted until you have
a developed and refined business plan.
2. Look at the market.
You should regularly monitor
construction industry trends and your business market(s). You should also study
local economic projections and census data. A rise in population and a thriving
economy may lead to increased residential and commercial building spending.
After studying your market trends, connect this with your business plan to
develop a realistic idea of potential revenue.
3. Evaluate your expenses.
The next step is to evaluate your
with your direct costs, which are expenses related to a specific project and
include materials, labor and subcontractor services.
assess your monthly fixed costs like rent and salaries.
review how your remaining costs vary month to month.
This will help determine cash flow needs
at various times throughout the year.
4. Determine if your rates are reasonable.
Once you have evaluated your revenue
potential and your actual expenses, you will need to determine the amount of
revenue needed to pay your expenses while also leaving enough to show a profit
at year end. Your project rates may need to be adjusted accordingly.
5. Create a spreadsheet.
Organize this information in a
spreadsheet or online budgeting software. Choose a tool that is convenient and
easy for you to continue to use going forward.
6. Track your progress.
Compare actual results against your
budget and adjust your budgeted numbers as needed. You should review your
income statement and cash flow statement monthly. These reports can be created by your internal
accountant or CPA firm, and should be shared with other
members of your management team.
Maintaining a realistic budget will allow you to make informed business decisions that will lead to continued success. Use these tips to create a budget and keep your financial progress on-track as your year unfolds. Need help? Our Construction & Real Estate Group, comprised of numerous professionals, is committed to serving over 800 Minnesota construction and real estate entities. Contact us today to learn business strategies that will help you grow and save you money.
construction company accounting software may be a time-consuming and costly
process, but an ineffective accounting software is burdensome and impedes growth.
Are you a construction company owner? Have you considered changing accounting
Before committing to a new software package, you should asses the following:
- What are your construction company’s NEEDS from its accounting software?
The first step, before changing an accounting software, is to discuss with all employees. From shop personnel, who will be receiving inventory, to the CFO, who will be running reports. Ask these individuals, what tasks should the software ideally perform? What tasks in the current software are not operated in an efficient way?
- What are the potential time and cost BENEFITS a new accounting software could provide?
Discuss the time and cost benefits your construction company may experience from making a change in accounting software. Potential benefits include:
- Removing the need to double track jobs in an excel spreadsheet or other outside application.
- Reducing time related to chasing down paper documents. Many softwares are able to host all documents electronically.
- Improving office to job site integration through add-on applications to the accounting software.
- Increasing understanding of individual jobs, which can lead to improved estimating, budgeting, forecasting and predicting of costs for current and future jobs.
- Does your CURRENT accounting software meet the above needs?
Changing accounting software is a commitment from every level of your construction company. Once you have accumulated your list of needs, take the time to determine if your current software has the ability to meet those. Consider the addition of modules, training and support offered by the vendor. Also consider your level of satisfaction with your current vendor. If you determine your current software cannot meet both your current and future needs, you can then consider making a change
If, after the above assessment, changing accounting software is the best option, below are four items to consider:
- Fully Integrated vs. Basic Accounting Software
A fully integrated construction accounting software helps to ensure your job costing and the accounting general ledger should reconcile to the penny between each other. A fully integrated system includes things such as, construction payroll, billings, purchasing and subcontract controls, general ledger reports by job, and job reports. Basic accounting software will not include modules specific to job costing. However, there may be a separate job costing system to meet your needs and may be used alongside your accounting software.
Note: In most cases, it is beneficial to switch to a fully integrated software once your construction company regularly has $3 million in annual revenues or have five or more major jobs occurring at one time.
- Access & Portability
Things to consider include multiple user access, security preferences, multiple business support, cloud based versus server based, and mobile access. Determining what your construction company needs, will help eliminate software options that do not meet the minimal requirements.
- Knowledge Required
Take into account the knowledge and willingness of your employees. Some software requires high-level accounting knowledge to use, while others are geared towards individuals with limited accounting education or experience.
Be aware of all aspects of the cost of the software. This includes fees for upgrades, annual licensing, support fees, training and hardware costs. Often, the premium features are not part of the basic software package and have additional add-on costs.
construction company goes smoother and profits stay higher with the right accounting
software. Smith Schafer can help you choose the right
financial management tools for your construction company and guide you through
Smith Schafer is a recognized leader in providing accounting, auditing and consulting services to the construction industry. Our Construction Group, comprised of numerous professionals, is committed to serving over 800 Minnesota construction and real estate entities. From large construction companies to specialty contractors, we have the experience to bring you innovative solutions. Click here to schedule a free 30 minute consultation.
We look forward to speaking with you!
The main goal of Accounting Standard Codification (ASC) 606 is to create a similar revenue recognition policy and calculation across all industries. The construction industry, which has historically had its own guidance and industry practices, is no exception. Below are the first four steps as required by ASC 606:
- Identifying the contracts
- Identifying the performance obligations
- Determining the transaction price
- Allocating the transaction price to the performance obligations
Once you have completed the above, please continued reading for items that may affect the construction industry when finally recognizing revenue in step five:
1. Timing of Recognition
ASC 606 has two basic options for recognizing revenue once control has been transferred:
- over time or
- at a point in time.
In order to recognize revenue over time, one of the following criteria needs to be met:
- The customer receives and consumes the benefits provided by the seller’s performance as they perform.
- The seller’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced. For example, you are constructing a building on the customer’s land, even if construction is stopped half way through the project, the customer’s asset (land) has received value.
- The seller’s performance does not create an asset with an alternative use to the seller, and the seller has an enforceable right to payment for performance completed to date. For example, pre-fabricated wall panels are customized for a specific project and the contract stipulates once production starts costs are the customer responsibilities.
Before determining if a contract meets one of the above requirements, construction companies will need to understand when transferring control of the asset, as defined within ASC 606, occurs. It is not until control is transferred that revenue can be recognized. ASC 606 defines “control of an asset” as the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. Control includes the ability to prevent other entities from directing the use of, and obtaining the benefits from an asset.
Examples of indicators that transfer of control has occurred include:
- An entity has a present right to payment for an asset.
- Customer has legal title to the asset.
- Physical possession of the asset has transferred.
- Customer has accepted the asset.
These concepts are easier to conceptualize when the end product is a tangible item, but when considered in relation to the construction of a building, parking lot, house or any component within a larger construction project it becomes more difficult. Often in these projects, the customer will not accept the asset until all punch list items have been completed.
Percentage of completion and completed contract methods, in name, no longer exists. In essence, “billings in excess of costs” and “costs in excess of billings” will shift to the concepts of “contract liability” and “contract asset.” Instead of percentage of completion, contractors will use a cost “input method” as described in ASC 606 when calculating the contract liability/asset. Although the actual math using the new input method will be nearly identical to the calculation used for over and under billings, the path to this point will be different.
3. Change orders
Under ASC 606, the scope of a change order determines if it should be considered a separate contract or should be combined with the original contract. The determining factors in that decision is based on if the change order results in an addition of a distinct good or service and if that good or service reflects the standalone selling price.
4. Wasted materials
The accounting for wasted material was emphasized within ASC 606. If a construction company has wasted costs (purchased the wrong materials, had re-work due to error, poor job management, etc.) those costs are recognized immediately and not taken into account as a job cost. Therefore, this is not part of the cost input calculation when recognizing revenue over time.
5. High material costs
Based on the type of construction project, material costs can be the majority of the total job costs. ASC 606 requires construction companies to consider the realistic progress made on a job when determining if the material costs can be included in the cost input method calculation.
Example – If a $500,000 job includes a $300,000 generator and on day one of the job the generator is purchased, the calculation would exclude the $300,000 in costs and in contract value when completing the cost input calculation.
Even with nearly a decade of warnings, revenue recognition has arrived quickly, and is now requiring the attention of construction companies. Without careful planning and reviewing of contracts, revenue streams could unintentionally change.
Do you understand the impact of the new accounting standard on your construction company? Revenue recognition has been around since 2010, when the first draft of the new standard was released. Three exposure drafts and numerous accounting standards later, it will be required to recognize income under the five step approach beginning December 15, 2018.
Buying another construction company can be an attractive way to grow your revenue base.
A merger or an acquisition allows you to:
- Add a new subcontracting specialty,
- Acquire an experienced labor force to reach new markets, and
- Deepen your penetration into the market your firm already serves.
But there is more to mergers and acquisitions than agreeing on a purchase price and signing the paperwork. For example, which employees should be made privy to the transaction? And how do you account for the purchase of your new division or subsidiary? Your legal, tax and accounting advisors can help you navigate the M&A process and employ the latest “best practices.”
Buying another construction company can be an exciting proposition. It may be tempting to spread the news that your firm is “in the market” for a merger or an acquisition. You might even think this will boost morale within your firm, because your employees will share in your sense of impending conquest and enthusiasm.
However, best practices in the M&A process caution against discussing your purchase intentions or any of the details of a pending buyout. This is true whether an offer has been made or accepted — or if the purchase is only in the planning stage.
Employees see mergers and acquisitions in a completely different light than owners and key executives. Employees might become afraid, spread rumors and gossip, and speculate about “what-if” scenarios. Even the slightest leak in the acquisition process can snowball into a huge time-waster for your employees and can cause a public relations nightmare. It might also cause unrest among suppliers, customers, lenders and bonding companies.
Accounting for the Purchase
While you might not share your acquisition plans with employees and other stakeholders, never leave your accounting and legal professionals in the dark. They can be invaluable resources throughout the acquisition process. After all, would you ask your accountant to design a second story addition to your home? Of course not! Accounting for a business combination is a specialized function that should involve your accounting and tax professionals. Do not be fooled into oversimplifying M&A decisions. An accountant who specializes in business valuations is uniquely suited to help with buy (and sell) transactions. Below are some examples of key accounting considerations in business combinations.
The closing date for a business acquisition is pretty obvious. It is the date the papers are signed and control transfers from the acquired firm to your firm. However, from an accounting standpoint, the closing process may not be “over” for another year. Additional accounting evidence may unfold in the months following a merger or an acquisition. Hindsight could impact how you report the transaction.
It is important that at the first year-end after the business acquisition you consult with your accounting and tax professionals, who will make provisional entries that represent estimates of the remaining assets, liabilities, revenues and expenses that will be recognized in the coming year as a result of the M&A transaction. This proactive step may prevent you from having to restate your tax returns (or your financial statements) in a later year, which could be costly.
- Consolidated Financial Statements Required
When one construction company buys another, separate locations may continue to be maintained and the newly acquired company continue to operate as a separate and distinct business unit. In fact, there may be significant liability, morale-boosting and administrative advantages to letting the newly acquired company continue to account for its own sales and expense transactions using the existing accounting systems and personnel.
However, from a tax perspective and to be compliant with standard practices for financial reporting for banks and bonding companies, it is often necessary to create and maintain a set of consolidated business and accounting records.
Some refiguring of the values of the assets and liabilities held by the target firm on the date of acquisition may be necessary. Once these new values are calculated for the consolidated financial records, any leftover intangible value may be booked to “goodwill.”
The goodwill account is a fixed asset that appears on your consolidated financial statements after a merger or an acquisition. It generally will not be questioned as long as your accounting, finance and tax professionals document the transaction thoroughly, completely and accurately.
Do It Right
Mergers and acquisitions provide exciting opportunities for growth. But these transactions can also be daunting, especially for construction firms who decide to handle legal and financial matters in-house. To bring you innovative solutions, our Construction and Real Estate Group stays on top of industry issues, trends, tools and technologies to ensure we give you the best possible advice. Smith Schafer professionals have serviced the construction and real estate industry since 1971. To learn more about how we can help, please contact a Smith Schafer professional.
Good accounting systems and practices are important tools for managing any construction business. Given the uncertainty in the construction industry, it is particularly important to monitor job performance, control costs, improve profitability and manage cash flow. To help our construction clients, prospects and others better understand the basic accounting procedures, we have provided the guide below:
Construction accounting is different from other types of accounting because of the long-term nature of many contracts. In a typical business, revenues are recorded when they are earned and expenses are recorded when they are incurred. This generally happens at the time an exchange occurs. However, with a long-term construction contract, this may last for several months or even years, waiting until an exchange occurs. This may result in misleading financial information. In order to present an accurate reflection of the company’s finances, there are two options to recognize construction revenue and costs.
- Completed Contract. As the name suggests, the completed contract method does not recognize revenues or expense until a project is substantially complete. In a simple example, a construction company enters into a $100,000 contract in June 2017. The job is expected to be completed in May 2018 at a cost of $80,000. Using the completed contract method, the company would recognize all revenue and expense in 2018, regardless of actual costs incurred during 2017. The completed contract method is typically only used for short-term contracts or when contract costs are difficult to estimate.
- Percentage of Completion. Under the percentage of completion method, revenue and costs are recognized as a contract progresses toward completion. Most construction companies, with long-term contracts, should use this method. Using the contract example from above, assume the company has incurred and recognized $32,000 of costs as of the end of 2017, the project is considered to be 40 percent complete. Thus, the company would also recognize 40 percent of the total expected revenue, or $40,000.
These two methods are not interchangeable. Once an accounting method has been chosen, it must be applied consistently to all similar contracts.
All construction jobs have direct and indirect costs associated with them. Direct costs include labor, subcontract expense, materials, equipment, and tools. Since these costs are directly related to a project, it is easy to allocate them. Indirect costs are those benefiting more than one job, such as insurance, supervisor wages, rent and utilities. A construction company needs a reliable method for allocating these indirect costs to the various jobs that they benefit. An accurate allocation method will lead to a more realistic representation of job costs and profitability.
CASH FLOW MANAGEMENT
A construction company owner should always consider ways to improve cash flow when negotiating contracts, specifically retainages, payment terms and penalties for late payments. Ensure invoices and change orders are processed and sent quickly. Consider shortening payment terms with customers or offering a discount for prompt or accelerated payment. Effective cash management is essential to maintaining a construction company’s overall financial health and plays a vital role in the success of the business.
Industry knowledge and close collaboration are instrumental in providing our construction clients with the insight and awareness to make the best business decisions and seize growth opportunities. Smith Schafer is a recognized leader in providing accounting and consulting services to the construction industry since 1971. We have a team of experts, focused on working with the construction industry, and committed to helping our clients succeed. If you have questions about improving your business model, implementing an accounting practice or tax planning strategies to improve operations, Smith Schafer can help. For additional information, click here to contact us. We look forward to speaking with you soon.
The new tax reform law is the most significant tax legislation in decades. Now construction companies are trying to digest the details and evaluate how the changes will impact their tax situation. One key objective was to reduce taxes on companies doing business in the U.S. to make them more competitive. Prior to the change, the U.S. had one of the highest corporate tax rates globally.
While tax reform has been acknowledged as a good thing for businesses, many construction companies are still unsure how they will benefit from it. The good news is there are tax saving opportunities for industry companies, both large and small, that will result in immediate savings. Some of the changes include; new depreciation rules, expanded Section 179d limits, accounting method changes, percentage of completion requirement changes as well as a new deduction for certain business owners. To help clients, prospects and others understand the changes, Smith Schafer has provided a summary of key details below.
KEY TAX REFORM CHANGES FOR CONSTRUCTION INDUSTRY
- Cash Accounting Method. Under the new tax laws, most construction companies will be permitted to use the cash method of accounting which includes not keeping inventory. This change applies to companies that did not exceed $25M in gross receipts for the prior year.
- Percentage of Completion Method. Small construction contracts completed within the next year are exempt from using the percentage of completion method. It is important to note that the taxpayer must be able to pass the $25M gross receipts test.
- Bonus Depreciation. This allows a company to immediately deduct a percentage of the cost of the property when it is acquired rather than doing so over a period of years. Under the new law, construction companies can take advantage of 100% bonus depreciation. The bonus depreciation level is available for property acquired and placed into service between September 28, 2017 and December 31, 2022. After that time-frame, the bonus amounts are scheduled to decrease by 20% annually.
- Expanded Section 179d Limits. The new law increased the maximum amount a taxpayer can immediately deduct up to $1M in the year it was acquired. Beyond this, construction companies can now include roofs, HVAC, security, fire protection and alarm systems if they were installed after a building was constructed. This change creates additional tax saving opportunities for industry companies.
- Qualified Business Income Deduction. There is a new 20% qualified business income deduction for owners of flow through entities through 2025. Examples of flow through entities include partnerships, limited liability companies, and S corporations. The 20% deduction is limited to the greater of two thresholds including 50% of the W-2 wages paid by the business or 25% of the W-2 ranges paid by the business plus 2.5% of the unadjusted basis of the qualified tangible property. Be aware, these limits do not apply to taxpayers with income less than $157,500 or married couples with income less than $315,000.
- Entertainment Expenses. Under prior regulations a company could deduct 50% of the cost of business meals and entertainment and 100% of meals offered to employees as a convenience to the employer. The new law has eliminated the deduction for entertainment expenses and reduced the deduction for meals offered to employees as a convenience to the employer to 50%.
Under the new laws there is an abundance of tax saving opportunities available that extend beyond what is listed above. It is important to review your tax planning strategies to ensure you are in the best position possible. If you have questions about how tax reform will impact your situation or would like assistance with tax planning for 2019, Smith Schafer can help.
Smith Schafer is a recognized leader in providing accounting, auditing and consulting services to the construction and real estate industry. Our Construction Group, comprised of numerous professionals, is committed to serving over 800 Minnesota construction and real estate entities. For additional information, click here to contact us. We look forward to speaking with you soon.