Hindsight Is 20/20

Managing the Closeout Process

As a construction job draws to a close, a contractor’s interest can be diverted elsewhere. After all, there’s other work to be done, and supervisors are needed on other sites.

But the last stages of a job require management attention, too. Most importantly, when a job ends, a construction company should study its own performance and produce a closed-job report. Such a report can establish a formal end to a contract and provide the contractor with valuable lessons going forward.

How Profitable Was It - and Why?

A closed-job report gives you the opportunity to look back on a percentage-of-completion job to find out how profitable it was and why. By knowing the “why,” you can develop more precise and accurate bids on future jobs and, over time, focus on more profitable contracts.

Among the functions a closed-job report can perform are these:

• Declare the job complete. Closeout marks the end of a contractual relationship between contractor and owner. When an understanding is in place between site supervisors and accounting personnel that no more work will be done on a job, it’s reasonable to declare it over.

  But processes must also be in place to modify the report for post-job requirements. Warranty work, for example, can come up long after a job is complete. Various accounting software systems let contractors include warranty-work costs in a completed job, or accumulate such costs in a separate account.

• Account for all change orders. Contractors should be satisfied that the costs and billings for all change orders have been added to those of the job itself. This may involve choices: When should orders be recorded? Should all revenue be recorded, or just revenue up to the cost of the order?
  
• Account for retainage. Has retainage been billed and recorded? Different techniques are used to track billed and unbilled retainages, but the process must be consistent to ensure that the accounting for such transactions is correct. And closing a job means following up on your billings, too. Have you been paid?
  
• Open a window on profit fade. Profit fade occurs when the gross profit percentage is reasonable or even high in the early stages of the job, but becomes lower and lower as time goes on due to revisions in estimates of job costs.

  Contractors can analyze profit fade on the basis of completed closed-job reports by sorting jobs according to estimator, project manager, job supervisor, etc. If trends appear, they can be factored into the bidding process.

• Include post-completion job audits to review budget variances and overruns. Actual figures collected over several jobs will help put future cost estimates and bids on firmer footing.

Point of Substantial Completion Is Critical

It’s also critical to determine substantial completion, because that calculation dictates when profit is recognized.

Generally, substantial completion should be declared when remaining costs and risks are insignificant. A consistent approach is important in order to avoid the temptation to recognize completion on some contracts earlier than others. And the method used to determine substantial completion should be disclosed in accounting documents.

Detailed closed-job reports can help your company bid more effectively. Our firm can help you put them together.

Porter Keadle Moore, LLP is a founding member of ProfitCrew, an association of accountants and business advisors dedicated to helping construction companies build profitable businesses. For information, contactAdam Polakov at apolakov@pkm.com or Arvil Stanford at astanford@pkm.com or visit www.pkm.com.