May 9, 2024

As a CPA in public practice, the jobs in process and closed job schedules (“job schedules”) are the most important schedules we use to perform audits, reviews, and general business consulting.  Why? Because each individual project is its own profit center that affects the contractor’s balance sheet and income statement. In addition, the jobs in process schedule is the mechanism used to calculate revenue. Because the percentage of completion revenue is driven by an estimated cost at completion number, there is an inherent risk that revenue could be misstated.

I undertake the following steps to analyze the job schedules and gather information that makes me comfortable that they are materially accurate.

Step 1: After receiving the job schedules, I first determine if the current period total contract revenue earned and cost of revenue earned on the job schedules agree with the same lines on the company’s income statement.

    • Does the schedule reconcile?
      • If not, why?
    • Are there costs hitting the income statement that are not being charged to projects? Most of the time, the schedules don’t reconcile because indirect costs are not allocated to individual projects.
    • Does the total over and under billings on the jobs in process schedule agree with the balance sheet?

Starting my analysis with job schedules that reconcile to the balance sheet and income statement gives me comfort that I have a complete list of contracts, contract amounts, contract billings to date, and contract costs to date. The variable is the estimated cost to complete for each project. By performing steps 2-4 below, I am attempting to understand the company’s project performance and, ultimately, the accuracy of the revenue recognized.

Step 2:  I identify contracts that are significant to the contractor’s operations by conducting a contract risk assessment. I look at risk factors such as type of contract, size of the contract, type of work performed, project percentage of completion, geographic location, large over or underbillings, and other factors that I consider relevant for each contract.  Once I identify contracts that I deem are significant, I move on to step 3.

Step 3:  This step is about analyzing and getting answers to questions. Some of the questions asked in step 3 are:

    • How is the project’s estimated cost at completion determined?
    • Why is Project X so under/overbilled?
    • Why is Project Y’s gross profit % so much different than the company’s historical gross profit?
    • Why is Project W showing a loss? Has the contractor properly accounted for the entire loss as required by generally accepted accounting principles?
    • Why is Project Q’s contract value so much larger than other projects that the Company normally performs?
    • Why is the overall total gross profit percentage on the jobs in process schedule so different from the company’s historical gross profit percentage?
    • Why is the company performing below or above expectations in a certain industry segment?
    • Why is project manager Z performing above or below expectations on his projects?

Step 4:  Perform a gain fade analysis on significant projects open as of the prior period end.  At this step, I am looking to determine how the project finished versus what the company showed on the prior year’s jobs in process schedule.  I am looking for the following:

    • Did the project perform as expected?
    • Was there a large gain/fade on the project?
    • If there was a large gain/fade on the project, what caused it?
    • Does the contractor have a history of providing me with accurate project estimates?
    • Do I need to include a change in the estimate footnote in the audited or reviewed financial statements because of a large project gain or fade?

It’s crucial to recognize that job schedules have a broader purpose than simply meeting requests from CPAs, sureties, or banks at year-end. As controllers and CFOs integrate these steps into their regular routines, monthly reviews of job schedules can serve as a management tool for evaluating performance and aiding in making informed business decisions.

Don’t miss the upcoming CFMA’s Annual Conference where I will present “Real-World Construction Financial Insights” alongside Bruce Orr, CEO, ProNovos; Margie Morris, CCIFP, Partner, Guignard Company; and Gerardo Perez, Senior Vice President Relationship Manager, First Bank. In this interactive session, you’ll experience construction financial data insights from a data scientist, banker, CPA, and surety professional, using a real-world scenario to show you how they assess the WIP to make strategic decisions, identify areas of concern, and evaluate the health of construction companies. Then, it’s your turn to review a real-world scenario with your peers to review the data to identify issues and develop a solution.

 

 

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