In construction, year-end closing is a misnomer. That’s because the actions you take not only impact your 2022 books, business results, taxes, and financial statements. They can also inform your business strategy for the year ahead, while putting you in the best position for year-end close 2023 and beyond. What should you do to maximize the benefits your company can reap from year-end closing? Consider these seven factors:

1. Percentage of completion. Construction contractors’ financial statements should be prepared on a percentage of completion basis of accounting to comply with Generally Accepted Accounting Principles (GAAP). This requires contractors to list what jobs are open, the contract values of those jobs, and estimated total costs to determine estimated gross profit per job. This will be compared to total actual costs and billings at the balance sheet date, and income will be adjusted for any over and/or under billings.
2. Estimates for work in progress. Are there any open jobs where you are estimating you will lose money? What is driving those results? By analyzing what’s happening on a monthly basis, you and your project managers may be able to make course corrections to have a positive impact on 2023 income and future financial statements. If this is the result of low bidding or an estimate mistake, reviewing on a regular basis may help to pinpoint where additional costs were incurred and can be used to help avoid future profit swings and contract losses.
3. Profit fade. Reviewing project estimates and financials with project managers on a monthly basis can also be useful in that you are seeing profit fades or additional estimated income in real time. This allows any potential issues to be identified and addressed in a timely manner.
4. Bonding and insurance. The work you perform may require you to be bonded. Work with your insurance broker to find a surety for bonding purposes. Once your books are clean, look at your balance sheet to determine working capital (current assets minus current liabilities). A general rule of thumb is that 10x this number is your potential bonding capacity. Other factors to consider are business equity, profitability, and any outstanding loans between owners and/or affiliated companies and your construction entity.
5. Labor burden/workers’ compensation. Round up all insurance information from the year, including monthly invoices, policy premiums, audits, etc. to calculate actual insurance expense. Since labor burden is allocated to jobs, this number would have an effect on your over/under billings. Be sure to look at what is pre-paid versus payable, so you expense the right amount.
6. Break-even point. Do you know how much you need to sell to break-even? Calculate your break-even point using an average of your overhead for the year and an estimated total gross profit on jobs. Know how much in sales you must do to make money before the year even starts.
7. Backlog. By evaluating your open jobs at the end of the year, you can also determine how much profit is left that you’re going to realize for each job in 2023. Utilize this measure for the whole portfolio of your jobs to pre-determine an estimated gross profit for the coming year. You can use this to help figure out your breakeven, and any additional jobs may just be icing on the cake or backlog for 2024.

RBT CPAs has been a leading accounting, tax, audit, and business advisory firm serving construction companies in the Hudson Valley and beyond for over 50 years. If you’re already a client, you can trust your RBT CPA team will be addressing all the considerations previously mentioned when we meet with you for year-end closing. If you’re not currently a client but interested in learning how our CPAs specializing in the construction industry can support your 2022 year-end closing with a keen eye toward maximizing financials in 2023 and beyond, give us a call today.