Top 15 Accounting Habits of Successful Contractors

Who doesn’t love a list of the “Top” things to do? Topics like the “Top 15 Vacation Getaways for under $1,000” or the “Top 15 Road Trips Around America” garner a lot of excitement. So, it would stand to reason that a list about the “Top 15 Accounting Habits of Successful Contractors” would evoke a palpable state of euphoria, right? Perhaps I am overstating the hype that this article will produce. The fact is that accounting is often an afterthought for many contractors. However, successful contractors understand that good accounting is the language that translates the excellence they create in the field into a language that stakeholders such as bankers, insurance agents, and bond producers, as well as sureties, use to support their operations. In part one of this series, we are going to look at the first five accounting habits of successful contractors.

1. Hire a Highly Qualified Construction-Focused CPA

Successful contractors hire highly qualified construction-focused certified public accountants (CPAs). Just like contractors, CPAs have specialties. Contractor financial statements present unique information, such as a Work-in-Process (WIP) schedule, and contain required disclosures that are specific to the construction industry. Presenting this information properly gives sureties confidence in the financial statements they are using to make underwriting decisions. In addition, the Tax Code has specific provisions, many of them favorable, for contractors. Contractors should hire a CPA who understands the nuances of construction accounting and taxation. If possible, contractors should hire a CPA that also holds the designation of Certified Construction Industry Financial Professional (CCIFP). The expertise of these construction CPAs will probably cost more than the average CPA, but successful contractors understand that the quality of financial statements, expert tax advice, and industry-specific consulting will more than pay for itself.

2. Hire a CFO or Controller Who Understands Construction Accounting

Next, successful contractors hire a chief financial officer (CFO) or controller who understands construction accounting. Again, this generally is not going to be the cheapest option; but the dividends of hiring a highly qualified CFO are substantial. First, a highly qualified CFO will understand the language of construction and be able to converse seamlessly with project managers and subcontractors. This will help with the smooth administration of projects. Next, they will be able to provide outside CPAs with information in the format they need, which should save the CPA time and reduce the contractor’s bill from the CPA. A CFO with construction experience will be able to help a construction owner understand all of the financial information. There are several ways to find a good CFO. The easiest way would be to have the time and foresight to hire a staff accountant, let them work and train under an existing quality CFO, and then promote the staff accountant when the time was right. If you don’t have the luxury of time, another option would be to advertise the job opening and ask your CPA to help you interview candidates so the CPA can determine the candidate’s understanding of construction accounting. Lastly, contractors frequently hire a CFO from the ranks of the CPA firm that does their year-end audit and tax work.

3. Use the WIP Schedule as Tool to Manage Jobs

Another accounting habit of successful contractors is that they use their WIP schedule as a tool to help them manage jobs. Too often, contractors only produce a WIP schedule when the surety requests it for a bid or at year end for the CPA. However, a successful contractor that has a high-quality CFO will look at it monthly to identify jobs with issues, problem project managers, and cost overruns. Being able to produce timely, accurate WIP schedules is always appreciated by the surety team and the CPA.

4. Monitor Aging Accounts Closely

The best-in-class contractors monitor their aging accounts receivable like a hawk. Successful contractors will pass up on work if they know the owner or general contractor (GC) on a project has a history of slow paying or not paying. It has been my observation that, when it comes to accounts receivable (AR) collections, the “squeaky wheel gets the grease.” Often successful contractors will have an escalation in response to receivables as they age. For example, at 60 days the project manager will call the owner/GC; and at 90 days the construction company owner will call; and at 120 days it might get turned over to legal. Depending on the type of contract and the owner, that particular escalation may need to be adjusted. The key is to not let AR get old without following up.

5. Negotiate a Reduction in Held Retainage After Milestones Are Met

Related to number four, above, is retainage collection. It is possible that most or all of the gross profit on a project could be held in retention. That makes collecting retainage a crucial accounting step. Successful contractors negotiate a reduction in held retainage after certain milestones are met. A good CFO will track this and make sure the billings reflect the reduction in retainage. Obviously completing the project and punch list items is a must (and outside of accounting). However, it is important to communicate with the CFO so the CFO knows when retainage can be final billed. Then a follow-up escalation process, similar to what was described in accounts receivable, should be followed until collection of retainage is received.

While this list may not be as exciting as the best vacation spots, following these steps can help save for a lot of vacations! Part 2 of this series will look at how successful contractors address billings and accounts payable.

By Bob Teska – First Published in NASBP Surety Bond Quarterly magazine. 

Bob Teska, CPA, CCIFP, AFSB, is a forensic accountant at MDD. He serves as a Director at the firm’s Southern New Jersey/Philadelphia office but is primarily located in Maryville, Tennessee. Prior to joining MDD, Teska was the Partner in Charge of Construction Services for a super-regional accounting firm in Upstate New York. More recently, he was the Director of Bonds Underwriting for a large U.S. surety company. Teska is an expert in construction accounting and taxation and specializes in all facets of surety and fidelity claims and litigation support. He can be reached at bteska@mdd.com or 315.480.0389.