Key Financial Indicators of Project Progress

By Robert Mercado and James Wiedemann
Contractors often can determine if a project is meeting completion milestones simply through
experience and intuition. But a more accurate method entails the analysis of data collected from the
accounting department, which should be monthly at a minimum. The key is knowing what data needs to
be reviewed and analyzed in order to determine whether the project is running as planned.

Contractors can use bid spreads to assess a job’s progress. Assuming this information is available,
knowing what other contractors bid on the project versus their own bid serves as a comparative gauge to
track expenses and progress. A large bid spread suggests a project may present more risk than
anticipated. This alone is an indicator that the project should be closely monitored to ensure that it
remains within the budgeted bid.

Contractors should maintain contract schedules that include all projects, open or closed, worked on
during the year. These schedules are essential for data analysis and must be tied into the contractor’s
accounting system to capture all billing and costs, including indirect costs such as depreciation of
equipment or certain insurance costs. Projects in progress should be reported on the percentage of
completion method of accounting, usually utilizing the cost-to-cost method.

Underbilling and Overbilling 
The cost-to-cost method compares the cost incurred on a project thus far to the total estimated cost at
completion in order to determine the percent complete. That percent complete is multiplied by the
contract value to determine the revenue the contractor earned on the project. The revenue earned, based
on the percent complete, is then compared to the amount billed on the contract. The difference between
these two amounts is the underbilling or overbilling on a project.

Underbillings imply two scenarios: Either the contractor was not able to bill for work performed due to
certain requirements in a contract, or the expected profitability on the project may be overstated.
Underbilling should be analyzed carefully in an effort to understand what went awry.

Overbilling, also known as job borrowing, is a more beneficial method, as it grants contractors the
opportunity to have their customers finance the project for them.

Overbillings can be the result of two different cases. Either the contractor front end-loaded the schedule
of values in a contract to allow for more profit at earlier stages of the project, or the estimated
profitability on the project is understated.

 
A contractor needs to be careful not to overbill on a good project to fund another project that is in
trouble. This may seem sound in theory, but could potentially result in the inability for the contractor to
fund the good project that was overbilled when invoices are submitted later for payment of the good
project.

Cash flow by project is another important analysis tool. A contractor must know which projects are
providing cash and which are using cash.

A contractor needs to be prudent when cash flow is provided by good projects and borrowed by poor
cash flowing projects. Doing so could be detrimental in the long term, should the poor cash flowing
projects not turn positive.

To calculate the net cash flow on a project, the contractor would compare the total amount billed on the
job (less the amount included in contracts receivable, including retainage) to the cost incurred on the
project (less the amount included in accounts payable, including retainage).

Usually, at the start of a project, the contractor is in a negative cash flow position. As the project
progresses, this negative cash flow position should dissipate, turning positive.

A negative cash flow position that persists throughout the project could be the result of poor billing and
cash collection practices, or poor estimates that may have a hidden loss on the project.

Projects should be separated by type and management. In analyzing projects by project manager, the
contractor can gain pertinent information about an individual’s abilities regarding future job bids,
completion and profitability. If a particular project manager’s jobs have consistent fades (reductions in
the estimated profit on a project), the contractor can identify these trends and isolate projects particular
to an employee’s strengths or weaknesses.

Determining Job Profitability 
An alternative analysis tool is to compare the anticipated profit percentage on a project to a historical
profit percentage earned on a similar project to see if the current project may be overstating the
anticipated profit. The following scenario represents how this tool could be beneficial in determining the
status of job profitability.

A school project is currently in progress for an electrical contractor anticipating a 15 percent gross
profit. However, historically, the electrical contractor earned 10 percent gross profit on other school
projects that were consistent with the current project. This would immediately raise concern that the
contractor is estimating too much in gross profit.

Once estimates toward completion are reviewed (ideally monthly), the data should be compared to a
prior period to determine if the project performance is better or worse than expected. This analysis is
typically referred to as project gain or fade. When a project has a fade, it is important to understand the
cause of that fade in an effort to reverse that trend going forward.
Contractors should utilize an accounting system that allows for a comparison of the budget of the
anticipated cost, by phase or cost code, to the actual cost incurred. This will allow for a better
understanding of what exactly is occurring on a project. For example, if a project anticipates $1 million
in labor costs and the actual labor expended on the project at a point in time is $600,000, the contractor
would be able to determine if it makes sense that 60 percent of the labor should be complete based on
the work performed and the balance of work left to perform.

Comparing the overall percent complete can be helpful. However, determining the percent complete by
individual phase or cost code will allow for improved accuracy and better project analysis.

Change Orders 
Contractors also should set restrictions regarding unapproved change orders. Often contractors will be
requested to perform work that is out of the scope of the contract. If this situation arises, the work should
not be performed prior to obtaining an approved change order from the customer for the new request.
Unfortunately, this is not always possible. The contractor is often told to proceed with the work, and the
price will be negotiated later. Essentially, the change order is approved for scope, but not for price.

The importance of limiting the occurrence in completing unapproved change orders is directly related to
the leverage a contractor has on a project. Once the scope is approved and the work is done, the
allowance for negotiation on price becomes much harder to bargain.

Simply stated, several methods exist that both protect and prevent contract schedules from costly profit-
reducing issues.

Contractors with the most success analyze their contract schedules monthly, if not biweekly or even
weekly. Employing this routine allows projects to run as scheduled and potential problems to be
anticipated before, rather than after, they occur.

 
Written by Robert Mercado - Partner, Marcum LLP
Contact Info: robert.mercado@marcumllp.com

Written by James Wiedemann - Manager of Assurance Services, Marcum LLP

Contact Info: james.wiedermann@marcumllp.com
Our construction team

Mike Karlins
Construction Practice Leader
Mike is an audit partner based in The Woodlands office and has
more than 30 years’ experience in audit services, agreed-upon
procedures, financial services, operational improvement and
mergers and acquisitions. He also has extensive experience in a
variety of financial reporting engagements for private companies in a
wide range of industries including construction, manufacturing, oil
field services and distribution. Mike serves as the Campaign
Treasurer for Brady for Congress and Brady Victory Fund . He is the
secretary/ treasurer for Construction Industry CPAs/ Consultants
Association (CICPAC) and a member of the tax and legislative
committee for Construction Financial Management Association
(CFMA). Mike has served has Chairman of the Board for both The
Woodlands Area Economic Development Partnership and The
Woodlands Area Chamber of Commerce. Mike is also a Certified
Public Accountant and earned a Bachelor of Science in Accounting
from the University of Illinois at Urbana-Champaign.

Lori Morales
Tax Partner
Lori is a tax partner in our Houston office and has nearly 20 years of
experience in public accounting. She works with companies in a variety of
industries including energy, manufacturing, real estate, construction, and
professional services. Lori’s primary focus is on helping family-owned,
middle-market companies navigate the intricacies of federal and state tax
compliance and assisting them with all manner of business tax consulting
from tax planning to ownership succession as well as business expansion,
mergers and acquisitions, and more. Prior to joining Calvetti Ferguson, Lori
worked with a renewable energy start-up company, assisting them with all
aspects of accounting, finance, and business development. She is a
Certified Public Accountant, member of CFMA, and earned her Bachelor of
Science in Accounting from the University of Missouri – St. Louis.

Ken Sibley
Tax Partner
Ken is the Partner in charge of the Dallas office of Calvetti Ferguson and
has more than 30 years in the public accounting industry. He is experienced
in audit, tax and consulting with clients in planning, internal control, fraud
prevention and litigation matters. Prior to joining Calvetti Ferguson, he was
the founding member of Sibley & Company, P.C., which merged into a
national firm in 2011. Ken is a Certified Public Accountant and earned a
Bachelor of Business Administration in Accounting from the University of
North Texas. He is also a member of CFMA, Certified Fraud Examiner, as
well as certified in Financial Forensics.

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Our construction team

Sarita Akin
Tax Senior Manager
Sarita is a tax senior manager and has more than 25 years of
experience in public accounting and industry. She has advised
clients in the oil and gas industry, family-owned businesses and the
individuals who own them, multi-state corporations and benefit
plans. Sarita’s expertise is in the preparation of individual,
partnership, fiduciary, estate and corporate tax returns. She is a
Certified Public Accountant and earned a Bachelor of Business
Administration in Accounting from the University of Texas at Austin.
Sarita is the sub-committee chairperson of the Finance Committee
for the San Antonio Livestock Exposition and Go Rodeo Roundup
and a member of CFMA.

Scott Contreras
Audit Manager
Scott is an audit manager and has nearly 10 years of experience in
public accounting. His clients operate in the oil and gas, construction
and retail, and manufacturing and distribution industries. He also has
extensive experience auditing employee benefit plans. Scott is a
Certified Public Accountant, member of CFMA, and earned a
Bachelor of Science in Mathematics and Accounting from Sam
Houston State University.

Kyle Kmiec
Tax Manager
Kyle is a manager in the tax practice and has over eight years of
experience in public accounting. His focus is on partnership,
corporate, real estate, and personal income taxation. Kyle is a
Certified Public Accountant, member of CFMA, and earned a Master
of Business Administration in Accounting from Midwestern State
University.