A partner at accounting and management consultancy firm Kerber, Eck & Braeckel LLP said in a recent report that small and midsized construction firms that do not have chief finance officers in their employ need updated contract schedules to determine accurate profits.
Certified public accountant (CPA) Kate Ward said there are four important considerations in determining the accuracy of contract schedules, which is in turn needed to ascertain true profit margins. She explains that too often, in-house accountants record different figures as compared to audited balance sheets.
Thus she said, it is important to note the following:
- Accounting for and allocating indirect costs on the schedule—includes overhead, repairs, equipment maintenance, and liability insurance. Companies can use advanced job costing software to accomplish this task.
- Updated estimated costs to complete—Ward says this is “the most important number on the schedule” because it can “significantly change the bottom line profit or loss.” Thus, she added, the firm should ensure the estimate reflects current projections.
- Losses in jobs in process—in case there are losses; these should immediately be recognized and recorded.
- Proportionality of profit margins—the company should make sure its profit margins, especially on small projects and time and material jobs, remain at healthy levels.