Financial monitoring of projects is critical to success in today’s construction market, according to Kathryn Crosby of C2 Consulting, Salt Lake City, Utah. Speaking to the Mechanical Contractors Association of Georgia’s annual Mechanical Industries Council retreat in Pensacola Beach, Fla., Crosby explored the importance of monthly financial monitoring of projects and of the company as a whole.
"If your projects are not profitable you cannot stay in business," she said, "and the only way to know if they are profitable is to track them."
She added that such reports can be very useful to foremen.
"Your field foremen have all the risk dollars flowing through their hands," she said, adding that field foremen should be armed "with everything they need to get that job done." She added, "They literally hold your wallet in their hands."
Monthly Project Status Reports
These reports should be prepared by the tenth of each month, once the month’s major costs have been posted, and include amounts billed (gross and net), cash received, posted costs to-date, original estimated costs, and approved and unapproved change order amounts. Also needed is info on what the job will cost at completion, how much cash has been spent on the job, and the previous month’s report.
Crosby has developed a monthly project status report form that incorporates these elements to give what she calls a "financial snapshot" of the project.
"It will tell you if you are cash positive or negative on the project," she noted, "and will give you the gross margin percentage on the project as well as the percent complete." The report also indicates whether the project cash flow is positive or negative, whether it’s over/under billing, and whether it’s showing profit fade or gain, plus the dollar amount of changes outstanding.
She reiterated the need for prompt preparation of these reports.
"It is essential that this report be done as quickly after the end of the month as possible," she said.
Forecasting is an important element. Owners are making decisions based on estimates, she said, "and the estimates better be good."
Most difficult is forecasting labor. Crosby suggested that contractors break labor into small pieces, making sure that labor codes are logical and that foremen code labor correctly.
Material forecasting is easier. Writing purchase orders and nailing down prices allows you to lock in price and negotiate terms, although price volatility can be a factor. Freight-related issues should be considered, and counter buys should be limited.
The least risky element is forecasting equipment, she said.
To aid subcontractor forecasting, subcontractors must have subcontractor agreements obligating them to the terms of the prime contract.
Forecasting other direct job costs (such as rented equipment) "can be tougher," she said, because rental equipment sometimes goes over.
Forecasting costs for change orders (approved and unapproved) must also be included, she said, and is easier because the labor is usually in small chunks.
The presentation also addressed issues of cash position.
"The only way to get cash positive is to over-bill," she noted, meaning that you have collected more than you have spent. "This means you are running on the owner’s money."
To be under-billed and cash negative, where you’ve spent more than you’ve collected, means "the owner is using you as the bank."
"You want to avoid that at all costs," she said, adding that under-billing is often a sign of a job in trouble.
Crosby reviewed several sample monthly status reports, commenting on what each revealed.
She also discussed profit vs. markup.
"Do not confuse the two," she said.
WIPs, Financial Statements and Financial Ratios
Crosby also looked at work in progress (WIP) reports, which give a "snapshot" of the position of the entire company. She also reviewed how WIP numbers are incorporated into financial statements, which "are as important a tool as anything used in the field" and show how much money the company is making as opposed to billing. She also discussed how financial ratios, calculated from financial statement info, are used by sureties, lenders and company management owners.
Crosby concluded by underlining the importance of producing job status reports, WIPs and financial statements monthly.
"Producing financial statements and job status reports many weeks or months after the period has ended is much like driving a car with only the rear view mirror," she said.
Crosby is a past member of the Mechanical Contractors Association of America board of directors, former chair of MCAA’s Project Management Education Committee and former vice president/CFO of Harding Mechanical, Inc. She can be reached at email@example.com.