Growing Contractors: Your Financial Practices · © 2015 | All Rights Reserved | 805 King Farm...
Transcript of Growing Contractors: Your Financial Practices · © 2015 | All Rights Reserved | 805 King Farm...
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© 2015 | All Rights Reserved | 805 King Farm Boulevard | Suite 300 | Rockville, Maryland 20850 | 301.231.6200 P | 301.231.7630 F | www.aronsonllc.com
Your Financial Practices
Growing Contractors:
blogs.aronsonllc.com
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1. Growing too fast
2. Obtaining work in a new geographic region
3. Dramatic increase in single job size
4. Obtaining new types of work
5. High employee turnover
6. Inadequate capitalization
7. Buying unnecessary equipment
8. Poor estimating and job costing
9. Poor accounting system
10. Poor cash flow
Top 10 Reasons Contractors Fail
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© 2011 | All Rights Reserved | Aronson LLC | www.aronsonllc.com
Presenters
3
Chavon Wilcox is a partner in Aronson LLC’s Construction and Real Estate Services Group. She has over 13 years of experience providing accounting and assurance, business/personal taxation, and business consulting services to construction and real estate companies. Her clients include general contractors, subcontractors, joint ventures, real estate developers, homebuilders, property managers, and design/AEC firms. 301.231.6288 | [email protected]
Chris Vasquez is a senior manager in Aronson LLC’s Construction and Real Estate Services Group, where he provides accounting, assurance and tax services to construction contractors and also performs operational reviews and litigation support for emerging contractors. As an expert in the field, Chris has conducted presentations on the latest accounting trends to various sureties and bankers.301.231.6244 | [email protected]
Michael Corcoran is a senior manager in Aronson LLC’s Construction and Real Estate Services Group. With more than 11 years of professional experience, he provides comprehensive assurance, tax and consulting services to general contractors, electrical contractors, mechanical contractors, heavy and highway contractors and masonry contractors with revenues ranging from $2.5 million to $4 billion. 301.231.6223 | [email protected]
Timothy Cummins leads Aronson LLC’s Construction and Real Estate Services Group. He joined the firm in 1982 and has spent over 20 years in the industry. Tim's clients include construction professionals, including general contractors and subcontractors, real estate developers, and property owners. Tim specializes in general accounting, tax, litigation support, strategic planning, and business consulting services. 301.231.6213 | [email protected]
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GC Subcontractor
< $250M < $100M Fully Integrated Management Team
$50M – $250M $25M – $100M Increased Specialization
$15M – $50M $10M – $25M Professional Management
$1M – $15M $500,000 – $10M Estimator & Additional Superintendent
< $1M > $500,000 Entrepreneur
Construction Contractor Stages of Growth
“Mom & Pop” Focus
“Get Work, Do Work” Focus
Project Management Focus
Market, Client Focus
Total Quality Focus
Management StyleAnnual Sales
Where are you now? Where are you going?
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Agenda
• Accounting Back Office
• Job Costing
• Change Order Management
• Cash Management
• Growth Management
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Accounting Back Office
• Accounting System
• Accountant, Internal and External
• Internal Controls
• Financial Reporting
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Organizational Structure Growth Projections
Accounting System
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Collaboration & Participation Construction Specific Software
Accounting System
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Accountant, Internal and External
What’s the difference?
• CPA
• Accountant
• Bookkeeper
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Internal Controls
Basic Functions that Should Operate Separately:
1. Authorization
2. Recordkeeping
3. Custodianship
4. Reconciliation
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Internal Controls
• Responsibility rests with the owner and top management
• Other factors that influence controls include:
• Size of Your Business• Management Style / Delegation• Cost of Procedure• Collection of Information
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Financial Reporting and Analysis
Most important criteria….
USEFULNESSHow?
• Comparability• Historical records• Budget or projections• Decision making tool
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Financial Reporting and Analysis
• Balance Sheet
• Income Statement
• Work In Process Schedule
• Gross Profit Analysis
• Cashflow Analysis
• Financial Ratio Analysis
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Why is Job Cost so Important?
1. Revenue Recognition/Job Profitability
2. Billings and Cashflow
3. Cost Accumulation Support
4. 3rd Party Scrutiny
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Example ComparisonNo Indirect Costs Allocated Indirect Costs Allocated
Year 1 Year 2 Year 3 Year 1 Year 2 Year 3
Contract Amount $ 500,000 $ 500,000 $ 500,000 $ 500,000 $ 500,000 $ 500,000 Direct Costs 425,000 425,000 425,000 425,000 425,000 425,000 Indirect Costs - - - 50,000 50,000 50,000 Gross Profit $ 75,000 $ 75,000 $ 75,000 $ 25,000 $ 25,000 $ 25,000
Gross Profit % 15% 15% 15% 5% 5% 5%Percent Complete 47% 94% 100% 51% 94% 100%
Contract Revenue Earned $ 235,500 $ 470,500 $ 500,000 $ 252,500 $ 468,500 $ 500,000 Contract Costs Incurred 200,000 400,000 425,000 240,000 445,000 475,000
Gross Profit 35,500 70,500 75,000 12,500 23,500 25,000 Indirect Costs Expensed 40,000 45,000 50,000 - - -
Net Income (Loss) Before G&A $ (4,500) $ 25,500 $ 25,000 $ 12,500 $ 23,500 $ 25,000
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Direct Costs
• Actual labor charges and related payroll taxes, fringe benefits and insurance.
• Materials, including taxes, freight, storage costs, etc.
• Subcontractor costs
• Equipment (owned or rented)
• Other costs – bonds, permits, etc.
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Indirect Costs
1. Does the cost relate to the performance of a particular job in process?
2. Does the cost relate directly to your construction activities?
If the answer is YES to either question, then the costs should generally be included as a direct or indirect cost.
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Types of Indirect Costs• Project management• Estimating• Safety• Purchasing• Contract administration• Labor burden• General conditions • Small tools and supplies• Vehicle and communication costs• Insurance• Other costs
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Types of Cost Pools
• Labor burden• Equipment• Shop and yard • Vehicle• Job overhead
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Cost Pool ExamplePlumber Welder
Base Hourly Rate $ 18.00 $ 27.00
Burden Rates:Payroll Taxes
FICA & Medicare 7.65% 7.65%Unemployment - Federal 1.50% 2.75%Unemployment - State 1.00% 1.00%Total Payroll taxes 10.15% 11.40%
Fringe BenefitsHealth, Life and Disability Insurance 8.00% 10.50%401(k) Plan 6.00% 6.00%Other 2.00% 4.00%Total Fringe Benefits 16.00% 20.50%
InsuranceWorkers' Compensation 8.00% 12.50%Liability 2.00% 5.00%Other 0.50% 0.50%Total Insurance 10.50% 18.00%
Total Labor Burden Rate % 36.65% 49.90%
Total Cost per Hour $ 24.60 $ 40.47
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Cost Allocation Objectives
1. Comparability between actual and estimated costs
2. Bill and collect for all your costs incurred
3. Compare to your industry segment
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Change Order Basics
• What are change orders?– Assertion of a contractor’s right to
additional time to complete the work, and/or additional money.
• Some reasons why change orders arise:– Design errors– Changes in market conditions (new products)– Undisclosed existing conditions– Extra work
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Most Types of Change Orders
• Owner-acknowledged changes– Changes initiated or approved by the owner
• Constructive changes– Owner caused additional work
• Not initiated by the owner– Rejection of conforming work, acceleration, problems with owner provided
equipment
• Consequential changes– Incurred as a result of another change on the project– Domino relationship cause and effect
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Basic Cost Elements of Change Orders
• Direct costs: labor, materials, subcontractors
• Indirect costs: home office overhead, opportunity costs, lost profits
• Consequential costs (damages): interference, disruption, re-sequence
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Major Components of Change Order Management
– Prospecting the change orders– Preparing the change orders– Pricing the change orders– Presenting the change orders– Performing the work– Payment on change orders
Change Order Management
Change Orders
Prospecting
Preparing
Pricing
Presenting
Performing
Payment
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Clear identification of work that is beyond the scope of the original contract:
– Reviewing the design process to determine if properly completed– Investigating the contract to expose potential conflicts– Researching documents to identify any errors or omissions
Prospecting the Change Orders
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Preparing the Change Orders
Establish a change order file to include:– Date of discovery– Company or personnel who discovered the change– All written documentation (change order form, contractor’s
change notice form, reports, invoices, minutes, emails, etc.).– Photos, plans, specifications, etc.– Notification letter to owner
• Dispute clauses generally indicate a specific time requirement for notification after discovery of the change
• Should include: time and cost estimates; owner is expected to make every effort to resolve the problems quickly; and contractor intends to be compensated for all effects of any change.
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Contractor’s Change Notice Form Example
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Pricing the Change Orders
Multiple complexities involve:– Use of forensic estimating– Use of delay analysis to allocate delay-days to various
responsible parties– “Measured-Mile” calculations– Use of industry-accepted inefficiency formulas– T&M for obvious direct and indirect costs
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Presenting the Change Orders
Three basic elements:– Direct costs– Indirect costs (home
office overhead, delay costs, opportunity costs, lost profit)
– Consequential costs (damages, interference, disruption, resequencing)
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Performing the Work
Tracking project effects:– Direct cost tracking is important– Indirect and consequential cost tracking is more important to
track• Must be tracked in explicit detail• Calculations must be accurate• Use of a robust cost accounting system and schedule documentation
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Payment on Change Orders
Billing and payment will normally follow the same procedures and timing of base contract billing.
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What is Cash Management?
Cash Management is the act of:
• Organizing,• Planning,• Collection of,• Investment, and• Disbursement……
of your Company’s CASH.
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Markup Margin
Tells us how much we need to charge given an estimated cost
Useful for determining contract prices
Difference between the cost and the selling price
% –
Ex. If Markup % is 30%, then the sales price is 30% above cost.
Tells us how effectively we are earning profit from sales
Useful for determining what percent of sales will be used to cover overhead and be turned into net income
Difference between the selling price and the gross profit
gi %
ex.. If Margin % is 40%, then 40% of the sales price is gross profit.
Markup vs. Margin: What’s the Difference?
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Markup vs. Margin: Impact on PlanningDetermining Sales Price with
a Target MarkupDetermining Sales Price with
a Target GP Margin %
Job Costs $ 100,000Markup 1.4**Sales Price $ 140,000Gross Profit $ 40,000Gross Margin 28.6%
** Knowing your markup is because you created a budget!!!
The Wrong Way: Job Costs $ 100,000Markup 1.29Sales Price $ 129,000Gross Profit $ 29,000Gross Margin 22.5%
The Right Way: Job Costs $ 100,000GP Margin (1-.0.286 = 0.714)Sales Price $ 140,000Gross Profit 40,000Gross Margin 28.6%
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Buy, Lease or Rent: Pros and Cons?BUY
PROS CONS
• Length of commitment/flexibility
• Tax Benefits (Depreciation, deductions of other related expenses)
• May have resale value down the road
• Use equipment at or near capacity
• High initial investment
• Must manage and pay for maintenance, insurance, storage, transportation etc.
• Equipment may become obsolete over time
• Use equipment below capacity
![Page 41: Growing Contractors: Your Financial Practices · © 2015 | All Rights Reserved | 805 King Farm Boulevard | Suite 300 | Rockville, Maryland 20850 | 301.231.6200 P | 301.231.7630 F](https://reader033.fdocuments.us/reader033/viewer/2022051916/60076f11eb0e040bd36db1cf/html5/thumbnails/41.jpg)
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Buy, Lease or Rent: Pros and Cons?LEASE
PROS CONS
• Low initial investment
• Length of commitment/flexibility
• Manage maintenance
• Lowers operating costs
• Interest rates generally higher
• Length of commitment/flexibility
• Complex accounting rules
• Leases could be expensive to break
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Buy, Lease or Rent: Pros and Cons?RENT
PROS CONS
• Low initial investment
• Length of commitment/flexibility
• Access to broad range and latest equipment
• Maintenance, insurance, etc. handled by rental company
• High rental fees
• Length of commitment/flexibility
• Needed equipment may be unavailable or already rented out
• If the project is delayed, you may be renting equipment that isn’t in use
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GC Subcontractor
< $250M < $100M Fully Integrated Management Team
$50M – $250M $25M – $100M Increased Specialization
$15M – $50M $10M – $25M Professional Management
$1M – $15M $500,000 – $10M Estimator & Additional Superintendent
< $1M > $500,000 Entrepreneur
Construction Contractor Stages of Growth
“Mom & Pop” Focus
“Get Work, Do Work” Focus
Project Management Focus
Market, Client Focus
Total Quality Focus
Management StyleAnnual Sales
Where are you now? Where are you going?
![Page 45: Growing Contractors: Your Financial Practices · © 2015 | All Rights Reserved | 805 King Farm Boulevard | Suite 300 | Rockville, Maryland 20850 | 301.231.6200 P | 301.231.7630 F](https://reader033.fdocuments.us/reader033/viewer/2022051916/60076f11eb0e040bd36db1cf/html5/thumbnails/45.jpg)
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Stages of Growth Worksheet
Management Operations BD / Marketing / Estimation /
Bidding
Accounting / Finance
Total Quality Focus
Market, Client Focus
Project Management Focus
“Get Work, Do Work” Focus
“Mom & Pop” Focus
Where is your business today? Where do you want to be?
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Questions