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A balance sheet is simply a snapshot of the assets, liabilities and net worth of a company on a specific day. The income statement, in contrast, presents what happened to the operations of a company during the last month, quarter or year, and looks only at the past.. The job schedules look at the past and support certain balance sheet and income statement accounts, while providing a look at the future. They clarify various items on the balance sheet and establish the backlog at financial statement date.
Key in job schedules is the profitability of jobs in progress at the report date. When the backlog of work is large, the potential future profit or loss has a large impact on the firm's ability to continue. If the backlog is low, a contractor must generate sufficient future profits to cover overhead and keep personnel on the payroll. The contractor must have a good set of financial statements, including the job schedules. Only then can financial strength be adequately understood and decisions made to keep the firm strong. Backlog, including the amount of estimated profit in the backlog, is a construction company's most important indicator of financial health.
Sureties look at contractors differently these days. In general, they have returned to traditional underwriting techniques. Job schedules have greater significance. Sureties want to know a contractor can properly estimate costs and fees and manage billings, cash and contract changes over the life of a project.
Analyzing your schedules The report should be ready for the surety and banker no later than 30 days after month's end. Tardy reports cause creditors to worry that bad news may be coming. If a delay is anticipated, creditors should be informed as to the status of the report and reason for the delay.
The estimates in the work-in-progress schedule for estimated final cost and fee should be as accurate as possible. Most contractors use the percentage of completion method to account for long-term construction contracts. Such estimates provide the basis for computing gross profit in income statements and calculating overbillings and underbillings in the balance sheet. Even though the forecasted final cost and fee are estimates and will change, they should not be approached with a cavalier attitude. The surety and banker are extending credit based on these reports, and they expect professional expertise from the contractor.
Monitor overbillings and underbillings, which provide insight into how well cash flow is managed. On a company-wide basis, a contractor should strive to be in a net over-billed position, which helps with the company's cash position. Overbillings are "money in the bank," and assure that the contractor is not financing the job. Overbillings will always decline at some point and disappear at the end of the job. The contractor then will need the cash from previous months' overbillings to pay the current month's job cost.
Significant overbillings by job could be indicative of problems. For example, it may indicate that all construction costs have not been recorded, which generally results from poor accounts payable cut-off procedures.
Underbillings, too, need to be clearly monitored by job. Bonding companies are concerned about continuous underbillings on a project that is more than half completed. If the company is in a net under-billed position, it may indicate poor billing or bidding practices, or it indicate profitability estimates are too aggressive. When the amount of underbillings exceeds 10 percent of equity or 20 percent of working capital, alarms will - and should - go off.
Whether your company is in a net over-bill or under-bill situation, know why. The best-in-class contractors are always in a net over-bill position.
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