Construction Companies – Managing Project & Monthly Profitability

Construction Practical Realities

Production of Management Accounts & Data for construction companies is highly complex because there are typically many projects on the go at one time, high volume of transactions, the timing of customer staged payments is different to the timing of bills, and quite often the invoicing dates are not aligned to the amount of work that’s taken place.

Construction Financial Reporting issues

– Sales overstatements: Sales Contracts are often split across multiple invoices to manage the timing of VAT liabilities for cashflow purposes adding extra layers of complexity vs. 1 invoice for the full contract value at the time of contract signing.

– Cost of sales overstatements: Much of the materials are billed upon delivery by suppliers, and quite often Construction companies have to make a large pre-order of materials to be ready day 1 the construction project begins.

– Labour understatements: Subcontractors raising bills can often be slow, and allocating staff costs to particular projects or particular time periods of work completed is time consuming and exposed for error.

Potential Consequences if you don’t make suitable adjustments

In layman’s terms, you end up with a Profit and Loss report that looks like gobbledygook casting you completely in the dark over your entire business finances. Furthermore the financial accounts must provide a true & fair view of the financial performance of the company whereby inaccurate accounting compromises your reporting obligations also. If you’re audited, you also risk an adverse audit report which could have a direct impact on your future trading ability; especially if you are on frameworks and approved supplier lists for minor works contracts where you have to disclose full accounts.

Importance of Accurate Bookkeeping & Management Adjustments

1. Detailed granular processing of bills & staff costs enable financial reporting in many formats; such as by department, by project, by time period etc.
2. Aligning costs to the accurate sales figure to identify gross profitability per department, project time period etc.
3. Identifying true sales based on actual work completed, allowing you to identify seasonal differences (e.g. Christmas shutdown period, Winter vs. Summer progress)

Operational Benefits

A strong finance function has major benefits on the operational efficiency of construction businesses for several reasons:

1. Incorporating procurement procedures in the review of supplier bills ensures billed prices are in line with expectations, quotes and agreed rates. Supplier price changes, supplier software changes, Supplier price discrepancies between regions/depots etc. are all frequent occurences.
2. Construction Suppliers are highly sensitive to bad debts, and therefore your supplier accounts face freezes, lower credit limits, or in severe circumstances closure where supplier terms are not being adhered to. Therefore, it’s imperative to review/scrutinise bills in a timely fashion, and report discrepancies prior to the payment due dates so that large suppliers who have separate credit control departments can identify specific issues as to why a bill may be unpaid, helping to avoid unwanted freezes and your work men grinding to a speedy halt on site.
3. Profitability of particular contract types or customer types etc. can be obtained, enabling your marketing and advertising efforts to focus on the best ROI areas.
4. There are likely many accreditations/regulators you are part of such as ISO, CHAS, Constructionline, FCA, Review sites (e.g. Which!, Checkatrade, Trustatrader etc.), NHBC, Insurance Backed Guarantees (e.g. DGCOS, Home Improvement Protection etc.), along with being on public frameworks and approved supplier lists (e.g. Councils, Council grouped organisations, Housing Associations, Schools, Trusts, Universities, Acadamies, Care Homes etc.). Many of these organisations closely monitor your financial compliance or even request access to your financial accounts and even your management reporting. Providing excellent and timely reports to such stakeholders can show competence and credibility to reinforce the business going concern.

We can Help

We are a firm of Chartered Accountants working in many sectors, but one of which being the construction industry with many construction clients be it main contractors, subcontractors or ancillary services such as waste disposal & scaffolding.

We provide supporting services whether it’s only financial year-end accounts and corporation tax returns, VAT returns, CIS returns, Payroll & Auto-enrolment weekly & monthly, right through to full bookkeeping and management reporting, or supporting (top and tailing) your in-house finance team allowing them to focus on the highest priority areas or simply make the workload more manageable without having to employ another staff increasing overheads.