Summary: As construction companies grow, so do financial statements and operations. Bonding agents trust financial statements that reflect construction realities: percentage-of-completion accounting, accurate job cost reporting, reliable WIP scheduling, and strong cost controls.
Aprio’s dedicated construction-focused specialists work with construction contractors at every stage of growth, helping them build financial foundations that are credible, consistent, and bond-ready. We know that as construction companies grow, the challenges they face evolve, requiring not just more revenue but stronger systems, clearer reporting, and greater operational discipline.
To guide your company through this progression, we have prepared a series of articles that explains how financial systems, reporting, and controls must evolve as your company moves through each stage of growth.
In our first installment, we focus on the foundation: why trusted financial statements, and the credibility behind them, are essential to bonding capacity and sustainable growth.
The Early Stages of Financial System Development
The construction industry faces financial challenges that differ significantly from those of other industries. With many projects that often take months or years to finish, cash collections are usually staggered rather than made in a single lump sum and may not reflect work completed on the project. Fluctuations in material and labor costs also affect construction costs. These factors impact cash flow and can make it difficult for construction companies to build a strong, early financial foundation.
To begin preparing a credible financial record, here are some key considerations to keep in mind:
What is Cash Accounting?
At the beginning, the contractor typically follows the cash accounting approach to prepare financial statements. This method requires minimal bookkeeping as real cash inflows and outflows are used to record activity. For example, costs paid in March represent March costs, and cash received in March represents March income, regardless of when the work was done.
Understanding the role of cash accounting helps improve financial organization. Additionally, cash accounting works better for smaller construction companies that manage short-term projects because it provides a clear picture of the cash balance for a project at any given time.
How Can a Part-Time Bookkeeper Help?
A part-time bookkeeper helps small construction firms organize records and maintain accurate, timely financial documentation. Their responsibilities include updating payment records, managing receipts, and reconciling bank statements. It is necessary for the bookkeeper to have attention to detail to record transactions correctly and identify errors as early as possible.
Consider hiring a part-time bookkeeper to help in preparing credible financial records for the accountant.
What Should be Prepared for the Accountant?
Make sure the financial records include year-end internally prepared financial statements, checks, paid and unpaid bills, outstanding and paid invoices, and tax returns. Remember that accurate financial reporting is vital in building credibility, and documenting everything is key to indisputable evidence of all financial activities. These basic financial documents should be well-documented and prepared in advance for the accountant.
What Do Construction-Experienced Accountants Evaluate?
Beyond basic documentation, experienced construction accountants consider several industry-specific factors during evaluation of:
1. Percentage-of-Completion (POC) Risks
The POC method is widely used in the construction industry, recognizing revenue and profit based on the share of work completed on a particular project. The work completed on a project is estimated based on the costs incurred to date compared to total estimated costs.
While larger construction companies use the POC method for revenue recognition, a construction accountant can help management identify profits or losses on in-process projects during the accounting period based on estimates provided. Your organization needs to determine reasonable expected values for total estimated contract revenue to be collected and contract costs to be incurred on a project.
While the POC method provides transparency and accuracy in financial reporting, it can be a potential avenue for misuse if contract revenue and cost estimates are not updated properly.
2. Job Costing and Work in Progress (WIP) Nuances
Job cost reporting is the backbone of trusted financials. Bonding agents expect timely, accurate visibility into job performance and the estimate-to-complete schedule. Cost and productivity data derived from accurate job cost reporting enable estimators to produce reliable estimates from schematic plans and specifications.
The WIP schedule is a financial document that provides an overview of costs incurred and revenues earned for a project over a specific period. It also serves as the basis for financial data and project milestones, and therefore it is an important tool for management to track financial performance. Construction accountants will review WIP schedules to reconcile financial data, review estimate trends, and track a project’s cash flow position. WIP schedules must be realistically planned because inaccurate estimates can erode bonding confidence as construction companies scale.
Final Thoughts: Why Working with a Construction Accountant is Essential as Your Business Scales
Growing your construction company requires careful planning. As your business scales, working with a construction accountant is vital to maintaining accurate, compliant, and bond-ready financials. Construction-savvy accountants are well equipped to increase bonding capacity as financial expectations evolve with growth. Remember, bonding agents evaluate statements for risk, control, and scalability.
If your construction company is looking to transition from informal financial reporting to more sophisticated systems and for actionable steps that support each growth stage, download our playbook, From Startup to Success: Navigating the 5 Stages of Construction Business Growth.
