Get it in the right bucket. Not all revenues and costs are the same. I'll be covering construction revenues and job costs in this lesson. This lesson is important to those of you that calculate work in progress on a regular basis.
Revenues:
Having an accurate billed to date amount on your work in progress schedule is crucial. This means separating out construction revenues from service revenues or other revenue streams. If you include billings from service contracts in your construction billed to date amount, it will skew your balance sheet and income statement, which could effect your bonding capacity in an unfavorable way.
Chances are you have a different revenue recognition policy for service contracts so your financial statements should reflect that. You may recognize a fixed amount or the entire amount billed when the work is completed in the same month. If that is the case, you should keep the billings separate on your books. Keep in mind that the percent complete method calculated by your work in progress schedule is meant for your construction contracts that allow for progress billings on a cost to cost basis.
Job Costs and General and Administrative Expenses:
Job costs should include costs associated with completing the construction project. That includes all of your standard costs such as labor, material, subcontractor costs, etc. and overhead allocations. A good way to check if you've got your costs down is to look at what you have in general and administrative expenses. Do your automotive and fuel, depreciation, salaries, insurance, equipment rental expenses look abnormally high in relation to job costs? Chances are you aren't allocating enough costs to your jobs. So what?! You may be asking. This may mean that you aren't budgeting correctly and you appear to be more profitable on a job than you actually are! But don't get carried away though and record every expense to job costs! Come up with a plan to overhead allocations.
Feel free to reach out with any questions at info@thewipreport.com.
Thanks!
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