It is part of their everyday job responsibilities. These same individuals within a construction company have an additional equally important reconciliation to prepare and understand. This reconciliation is completed in order to align the revenue and costs of revenue for any period to the same amounts on the completed and in-progress contract schedules. The following paragraphs outline some of the potential dangers of not completing this reconciliation.
Reconciliation of Revenue
Revenue is the easiest component to reconcile as the only variables are billing and the percentage of completion adjustment. One potential problem that can occur when revenue is not regularly reconciled to the job schedules relates to projects and service jobs not being included on the open and closed job schedules. The risk is that cost is incurred on a project and not billed in the same period that cost is incurred and revenue is then understated. A solution would be to add all the projects to the open and closed job schedules. This not only allows for a more accurate reconciliation of revenues but also assists in tracking the results of all projects no matter the size or type. This can be useful information in determining what type or size of work to bid on in the future. Another potential problem is related to errors on a non-integrated open job schedule which could result in improper revenue recognition (see below).
Reconciliation of Costs of Earned Revenue
The cost reconciliation is more complicated than the revenue reconciliation. A construction company’s most important resource is its job cost reports. This is where the cost associated with each project is accumulated and ultimately measured against the original estimate that was submitted on bid day. Owners, financial professionals, and project managers rely on the job cost report to measure the progress of a project. The costs included in a job cost report are accumulated as invoices and labor is entered into the general ledger and has been specifically coded to a project. The problem occurs when there are 1.) costs being charged to the general ledger that are not assigned to a project or 2.) indirect or labor burden rates that are being charged to a job cost are different than what is actually being charged to the general ledger. Proper cost recording and understanding any variances are integral factors in determining whether jobs are actually making the desired gross margin and if not, to determine the cause.
Non-integrated Open Job Schedules
Some companies utilize Excel or other spreadsheet software programs to track their percentage completion/open job schedule. Since this software is not integrated with the accounting and job cost software the company utilizes, there is potential for errors, including:
- errors that occur when numbers are entered onto the spreadsheet
- not using the appropriate cost-to-date or billed-to-date numbers when entered onto the spreadsheet
- formula errors in the spreadsheet.
Any of these errors will cause the percentage of completion calculation and the financial statements to be incorrect. A careful review of these non-integrated spreadsheets is necessary in order to guarantee proper representation of revenue and expenses for the appropriate period.
The reconciliation of revenue and cost of revenue for the period from the schedule of contracts completed/in progress to the income statement is an important exercise that every construction company should complete during the financial statement preparation process. The reconciliation helps provide credibility to the financial statements and ensures that all revenue and cost of revenue being charged to the financial statements is being charged to the proper project. These schedules, when prepared properly, are an invaluable tool to assist in determining the gross margin provided by certain job types or sizes. Additionally, this can provide useful information when bidding on jobs and in determining what types of work the company will perform.
Article written by:
Bob Biehl, CPA, CCIFP
Director, Construction Industry Services