Here’s what contractors need to know about backlog and how it can help their profitability. Tom Scalisi is a freelance writer with over 15 years of experience in the trades. He is passionate about educating contractors and subcontractors about getting paid and protecting themselves against payment issues. Through experience, he is able to recognize the industry challenges and believes education, communication, and preparation are the keys to avoiding cashflow problems for contractors and their families. There are several software programs that you can use to track your WIP, removing guesswork and errors from the equation.

Because PCM is anaccrual method, income is recognized when the contractor bills rather than when they’ve received payment. Construction CPAs can advise contractors on a number of different PCM methods to determine how much of the project “counts” as complete. These include cost-to-cost methods, physical completion methods and labor methods. The IRS requires contractors whose revenue exceeds a certain annual average or whose contracts are a certain length to use this method for tax purposes. This course created for those looking for an in-depth view of the Work in Progress schedule.

Manufacturers May Profit From Surety Bonds

It is common for profit margins to swing considerably with out of scope work being difficult to collect as each project has its distinct characteristics and tight funding source. Private work on the other hand sometimes is less competitively bid, is more customer focused and may offer the ability to be value added. Another challenge the valuator must assess is the entity’s workforce, talent pool, safety and training and union versus non-union.

Explain the process of getting their project’s ducks in a row so they know you’re experienced and reliable. Only after they trust you and understand the process should you discuss their timeline. Make it a priority real estate bookkeeping to have a solid understanding of what level of backlog is good for your company based on your market and project management style. Backlog is an important measure of the health of a construction company.

What Construction Contractors Need to Know About Backlog

For instance, too much work at a low margin may cause the contractor to not hit its profitability goals. Avoid projects that are outside of your niche or in locations where you won’t have the workforce or resources to feasibly fulfill the requirements. Above all, avoid the temptation to bid too low and potentially lose money if you’re awarded the work. Our firm can help you identify, calculate, and track key metrics related to backlog. When competition for projects heats up, some contractors feel pressured to bid on every job they can find, just to have work and keep staff on board. However, your company should bid only on projects that you have a high chance of winning and that will likely be profitable.

• I help commercial contractors having 1-10 million in annual revenue with accounting for the surety program.
• We help you maintain the documents to avoid missing out on dates or facing a backlog.
• Generally Accepted Accounting Principles is the set of standards and procedures that accountants use to record transactions and prepare financial statements.
• The ERC should be reviewed on a regular basis, usually monthly, to ensure that the contract is progressing as projected.
• Evaluate broker/agent and carrier performance based on objective metrics.
• Construction contracts often have a retainage or retention provision that allows customers to hold back a percentage of the payment until the job is completed as promised.
• It is imperative that costs comprising a project are relative to the cost included in the ERC.

The business cycle of the construction industry is sensitive to changes in the overall economy. There is often a lag in timing between the overall economy and the construction industry. For example, if the economy dips into a recession, construction companies may still have work as the contracts have been secured for the jobs.

How to Determine Inventory Shrinkage Percent

I see this error most often when companies are reconciling total revenue for the year and must account for some contracts that carryover from the prior year. Instead of backing out prior year revenue, companies back out prior year billings in error and are unable to reconcile revenue. Whether a system generated https://www.thenina.com/retail-accounting-as-a-way-to-enhance-inventory-management/ or an outside schedule is used, an effective jobs schedule should include information that is relevant for financial reporting and to monitor jobs individually. A Work in Progress report gives a snapshot of how a contractor’s uncompleted projects are performing based on estimates from the Contractor.

When it comes to taking great projects, sureties can make or break you. You might need to secure a payment or performance bond to take the project. Sure, it can make your business look punchy, allowing you to take projects at the drop of a hat, but it also means you’re merely treading water. What you actually need is balance, and managing your backlog is how you’ll get it.

Is a backlog good or bad for contractors?

It includes all direct contract costs along with the indirect costs that will be allocated to the project. The ERC should be reviewed on a regular basis, usually monthly, to ensure that the contract is progressing as projected. If you’re telling prospective customers that you can’t start their project for nine months, it’s going to be hard to win new jobs. This will often balance itself out over time, but it’s a dangerous trap to dig your way out from.

• If you’re telling prospective customers that you can’t start their project for nine months, it’s going to be hard to win new jobs.
• Private work on the other hand sometimes is less competitively bid, is more customer focused and may offer the ability to be value added.
• Industry and economic forecasts are also key to the future performance of a company.
• Accounting professionals who need a better understanding of construction risk management requirements.

There are a few different ways to look at backlog from a contract bond perspective. Surety Bond Companies compute backlog by subtracting Cost to Date from Estimated Total Cost. Some surety bond companies look at Remaining Billings as their measure of backlog. Effectively compare deductible or self-insured proposals to guaranteed cost programs. The success of a construction project results from the contributions and strength of the entire team — including the financial manager. It requires open communication, understanding and collaboration.

Another scenario to analyze would be if the average gross profit percentage would increase and all other variables would remain constant. For instance, if the above case study adjusted the number of man hours available and all other variables remained constant, Table 1 represents the impact that would have on the number of months in backlog. That, in turn, would give an inaccurate projection of the months in backlog.

• Doing so will shed light on where demand is high and which market sectors are healthy.
• Optimize your company’s insurance and risk management programs when working on projects with Wrap-Up Programs.
• Contractors should watch for projects that have a fade of the expected gross profit.
• Whether a system generated or an outside schedule is used, an effective jobs schedule should include information that is relevant for financial reporting and to monitor jobs individually.
• The backlog gross profit percentage is calculated as the backlog gross profit divided by backlog revenue, multiplied by 100.