2. SESSION 5
FINANCIAL
MANAGEMENT

3. INTRODUCTION
To obtain bonding and access to capital, contractor’s finances must be well managed
Session explains the basics of accounting systems used by construction firms
First part focuses on construction accounting methods, second part on reporting standards

4. PART A:
ACCOUNTING

5. LEARNING OBJECTIVES Identify an accounting system
Become familiar with methods that meet the needs for bonding, estimating, and reporting

6. COMPONENTS OF ALL ACCOUNTING SYSTEMS

7. FINANCIAL STATEMENTS Balance sheet Statement of earnings
Changes in equity
Cash flow
Notes
U.S. Dept. of Housing and Urban Development - Community Planning and Development
U.S. Small Business Administration

8. REPORT RELATIONSHIPS

9. GAAP METHOD OF ACCOUNTING

10. CONSTRUCTION METHODS ACCOUNTING
Note: Methods different from GAAP

11. PERCENTAGE COMPLETION METHODS

12. PERCENTAGE OF COMPLETION
Revenue recognized as received
Retention booked throughout the project
Expenses recognized as obligated
Estimated profits are distributed over time
Profit based upon projected revenues and expenses
U.S. Dept. of Housing and Urban Development - Community Planning and Development
U.S. Small Business Administration

13. COMPLETED CONTRACT Revenue earned at completion
Expenses booked at completion
Revenues and expenses are known
Useless for financial management
May create large swings in income
U.S. Dept. of Housing and Urban Development - Community Planning and Development
U.S. Small Business Administration

14. CONSTRUCTION ACCOUNTING SYSTEMS
Hardware
Software/Cloud Based
Features to look for:
Estimating
Davis-Bacon Payroll
Job Cost and Requisitions
Cost Control

15. TOP 7 PROGRAMS 2014 What do you use? Sage300 Dexter & Chaney Sage100
Foundation
Jonas
Computer Ease
Viewpoint
What do you use?

16. CONSTRUCTION ESTIMATING ACCOUNTING BASICS
Your calculated historic mark-up
Purchased databases
Negotiated rates

17. ESTIMATING SOFTWARE SUBROUTINES
Proposal generation
Cost database
Labor and material
Visual assemblies
Project reporting
“What if?” analysis

18. JOB COST LEDGER
Provides breakdown of construction costs on income statement
May provide a breakdown of revenues on the income statement
Costs are broken down by:
Job
Phase (optional)
Cost code
Cost type
U.S. Dept. of Housing and Urban Development - Community Planning and Development
U.S. Small Business Administration

19. JOB COST LEDGER JOB COST LEDGER JOB # PHASE # COST CODE MATERIALS
LABOR

20. COST REPORTING VERSUS COST CONTROL

21. COMPONENTS OF COST CONTROL SYSTEM
MANAGEMENT BY EXCEPTION: Investigating only those situations in which actual results differ significantly from planned results.
Strong job cost and equipment tracking
Costs must be current and up to date
Uses “management by exception”
Higher management is to mainly target and address “strategic” plans and decisions!
Follows established procedures
Data must be readily available

22. TOP 7 PROGRAMS 2014 SAGE (Timberline) Construction Estimator Tally
Pro Estimator
Clear Estimates

23. ACTION PLAN Take 5 minutes to: Consider software options and needs
Identify choice
Incorporate into Action Plan

24. PART B:
FINANCIAL REPORTING

25. INTRODUCTION
In this session, you will learn key financial ratios, self-evaluation compared to benchmarks, and financial issues (red flags) for sureties

26. LEARNING OBJECTIVES Understand basic financial ratios
Identify bond underwriting requirements
Identify financial issues

27. SURETIES LOOK FOR… Acceptable method of accounting
Related party transactions
Litigation/contingent liabilities
Totals and ratios: assets, debt, etc.
Backlog/billings over/under
Disclosure of an activity
U.S. Dept. of Housing and Urban Development - Community Planning and Development
U.S. Small Business Administration

28. SPECIALTY TRADE CONTRACTORS
KEY FINANCIAL RATIOS
GENERAL CONTRACTORS
SPECIALTY TRADE CONTRACTORS
CURRENT RATIO
1.1+
1.5+
[CURRENT ASSETS] /
[CURRENT LIABILITIES]
CASH RATIO
0.2+
0.35+
[CASH + CASH EQUIVALENTS + INVESTED FUNDS] / [CURRENT LIABILITIES]
WORKING CAPITAL TURNOVER
[SALES] / [WORKING CAPITAL]

29. DEBT-TO-EQUITY RATIO

30. EXAMPLE TOTAL ASSETS $825,000 CURRENT ASSETS $748,000
CURRENT LIABILITIES
$525,000
TOTAL LIABILITIES
$650,000
EQUITY
$175,000
SALES
$2,000,000
CASH + CASH EQUIVALENTS
$150,000 & INVESTED FUNDS

31. WORKING CAPITAL

32. WORKING CAPITAL TURNOVER
Measures gross contract sales compared to working capital
Is working capital being leveraged to produce revenue?
$2,000,000 = 8.97
$223,000

33. DEBT-TO-EQUITY Measures equity capital leverage
Total liabilities (debt) equity
$650,000 = 3.71
$175,000

34. RED FLAGS FOR SURETIES Late financial statements
Errors in financial documents
Insufficient supporting schedules
Change in CPA (good/bad)
Increases in non- construction activity
U.S. Dept. of Housing and Urban Development - Community Planning and Development
U.S. Small Business Administration

35. SELF EVALUATION
Take 10 minutes to review firm’s reports in comparison to benchmarks
How can your firm improve reports?

36. NEXT STEPS Link Session material to Action Plan elements as necessary
U.S. Dept. of Housing and Urban Development - Community Planning and Development
U.S. Small Business Administration

37. RESOURCES These resources provide more information on Accounting:
IRS: Construction Industry Audit Technique Guide (2009)
National Association of Surety Bond Producers (
Surety Information Office (