This is the second in a series of articles about the job schedule, including the work-in-progress (WIP) and completed contracts reports, which are critical components of contractors’ financial statements.
In addition to helping sureties, lenders, and other interested parties assess your company’s financial position, the job schedule also can help you do a better job of analyzing and improving your company’s performance. To do that, it is essential that the estimated costs on the schedule be as realistic and accurate as possible.
Costs Drive Revenue
The Financial Accounting Standards Board’s new revenue recognition standard, ASC 606, introduces new procedures for recognizing and reporting revenue from long-term contracts on your financial statements. (See the cover story in this issue for a more detailed explanation.)
Yet, despite the many differences between the new standard and the traditional percentage of completion (PoC) methodology, one important concept is carried over: In most instances, job progress will still be measured by comparing the costs a contractor has incurred so far to the estimated total costs of the project.
There are specific exceptions and variations but, generally speaking, project costs will still be used to determine when revenue can be recognized on most jobs. Therefore, it is so crucial that your management team estimates project costs realistically and reports them on the job schedule accurately.
Inaccurate cost estimates make it difficult to identify potential profit fade in time to take action. What’s more, bonding companies and other users of financial reports do not like unforeseen surprises—good or bad—because they cause them to lose confidence in your company’s ability to estimate jobs accurately and manage them efficiently.
When to Close Out a Job
In addition to realistic cost estimates, another common concern on the job schedule involves how to determine when a job is complete and should be moved from the work-in-progress report to the completed contracts list.
As with revenue recognition, the decision to close out a job should be driven by costs. Sending the final bill is not the determining factor.
Once you know all work on a project is complete and there is no expectation of additional costs, the job should be listed as closed. This applies regardless of whether the final invoice has been sent. (Of course, there should be no significant delays in billing for completed work.)
A comparable principle applies to final retention payments. If you have been paid for all costs but final payment is still being held back, the job stays on the job schedule but is moved from the WIP report to the completed contracts listing for the reporting period.
These entries should then be explained further in the Notes to Financial Statements, which will break out the accounts receivable to show details of retainage for both open and closed jobs.