By Mark J O’Donnell, CPA, Schmersahl, Treloar & Co
If any one thing is required to succeed in contracting, it is managing the contract. The best contractors have a reasonably well-defined processes for bidding, preconstruction planning, execution and project close out. Very few details are left to chance. Each job is different, and the details are critical to profitability. There are both external factors (unions, other contractors, environment, etc.) and contract changes to be considered. And of course, there is getting paid. In summary the major steps are;
- Planning (take off, estimate, bid, etc.)
- Check on benchmarks
- Modify the contract with CO’s as needed
- Complete the job.
- Get paid.
We have noticed that some, but not all contractors take a similar approach to managing the financial health of the business. Consider for a moment how similar the financial process is to the contract management process;
- Develop an expectation (planning)
- Check on benchmarks with month to month feedback (timely financials and job reports)
- Modify the plan based on significant changes
- Near the end of the year review the results and make key decisions (Complete the job)
- Get paid
Many privately owned businesses do not plan the year due to a general distaste for ‘budgeting’. No doubt, it is a negative concept. But would you even consider starting a contact without a detailed set of plans? Of course not, it is a recipe for disaster. If you just wing it, you will be lucky to get what you expected. Oddly enough, that is exactly how many of us manage our financial future, we just wing it. The most often used response is related to a general lack of the ability to control the financial results, that they cannot be reasonably predicted. It is very difficult to predict next year’s revenue with pinpoint accuracy. However, our experience is that when asked, many contractors can estimate how they will do (e.g. revenue) the next year with amazing reliability. If you can estimate revenue, most of the balance of the plan can be complied and spread out over a year. Even the most basic effort will establish a basic expectation and an effective tool for decision making.
During the year, monthly financials and job reports are critical to determine if you are meeting your benchmarks / financial objectives for the year. Just like a project, things will go well, or not so well. With timely and accurate financial reports and comparisons to your expectation, information will be there to support decisions to make changes (CO’s if you will) or remain status quo. Without those reports, the year-end results will be a surprise. More importantly, some of the decisions made during the year may not have been optimal, at best. Think about the analogy that was popular years ago. To sail a ship across an ocean, you have a clear starting place and a destination. Along the way there will be regular checks on the ships actual position and thousands of course corrections to deal with the many variables encountered at sea to get back on course. It is true of contract management and financial management as well.
As the year comes to a close, you will need an accurate projection of the financial results for the year, and appropriate advice as well. At least two topics are very important. First, a plan to minimize tax to the company (and its shareholders) over the year just ended, and the next year. Both years must be considered to take advantage of our current income tax structure. Second, a decision regarding how much of the current year’s profits must be retained in the company to build equity and support growth. Accomplishing those two tasks, its time for the owner to get paid!
The similarities between managing a construction contract and your corporate finances are striking. Affixing that same level of attentiveness brings a similar result, a job well done.
Mark J O’Donnell, CPA is a partner with Schmersahl Treloar and Co, a locally owned CPA firm serving successful privately owned businesses, not for profit entities and the professions. A significant portion of the clients Mark represents are either contractors or the companies that serve them. Mark is also Treasurer of the American Subcontractors Association Midwest Council.