An Overview of Key Financial Statements for Construction Companies

Construction companies often engage in long-term projects with complex requirements and staggered revenue recognition. These projects are often extremely capital-intensive. Success demands that firms maintain a keen understanding of their financial position at all times.

Many construction companies only produce financial statements once a year, as part of an audit. But in reality, it’s best practice to produce these far more often: on a monthly (or at least quarterly) basis. Doing so doesn’t just allow you to run your business more effectively, it can also lower the rate you’ll pay to be bonded by a surety.

Without access to updated, reliable financial information, it’s impossible for construction firm owners to understand the profitability of a project or plan for the future. While many firms rely on their cash balance and the owner’s intuition to gauge financial performance, these are both unreliable measures that can result in firms finding themselves in precarious cash financial positions.

There are four financial statements that construction companies should produce on a regular basis: a Profit and Loss Statement (or Income Statement), Balance Sheet, Cash Flow Statement, and a Work In Progress (WIP) Report. In this article, we provide you with a brief overview of each, highlighting the key details that construction firm owners and managers need to understand to build for financial success.

Profit and Loss Statement

A profit and loss statement, also known as an income statement, displays your business’s revenue and expenses over a certain period of time (usually a month, quarter or year). This report demonstrates whether your construction company was profitable and is usually the first financial statement interested parties will assess.

The profit and loss statement begins by reporting the revenue your company recognized during the accounting period. From there, it subtracts costs, which are categorized into several different buckets. After these have been subtracted, what’s left is your firm’s profit.

If your firm is working on multiple jobs at once, it should prepare P&L statements for each job to better understand the profitability of each project. This requires you to allocate indirect costs like payroll and insurance toward each project.

Construction companies can assess profit and loss statements over time to understand how their business is evolving. Changes in this statement might indicate an increase in costs, a lack of profitability in certain project types or many other trends that can better inform future strategy.

Balance Sheet

A construction company’s balance sheet displays the assets, liabilities and equity of the firm at a single point in time — typically the last day of an accounting period. This essentially documents the company’s net worth and is important in enabling sureties to gauge the creditworthiness of your company.

The assets captured in a balance sheet include all of your company’s cash, accounts receivable, and contract assets (formerly referred to as under billings), as well as any fixed assets such as equipment or vehicles. Liabilities are the money your company owes other parties, including accounts payable, contract liabilities (formerly referred to as over billings), and loan payments. It’s important that the figures on a firm’s balance sheet correspond to those on the WIP Schedule.

Subtracting the value of your firm’s liabilities from its assets gives you the equity — the value of the company. Depending on the entity structure of the company, this may be broken down further into retained earnings, investments and net income.

Cash Flow Statement

A cash flow statement tracks the flow of cash both into and out of the business, categorizing these cash flows into operating, investing and financing activities. Construction firms may be required to include additional disclosures that show non-cash activities such as taking on new debt.

Large construction projects are cash-intensive projects, and it’s important for leaders to track their accounts receivable balance, accrue charges appropriately, and forecast future cash needs to avoid running into unexpected liquidity issues. Assessing how your firm’s cash flow statement evolves over time is a helpful way to identify overspending, inefficient cash management, and your ability to fund future projects.

Much like profit and loss statements, larger construction companies will produce cash flow statements for each project their firm is working on.

Work In Progress Schedule (WIP)

The work in progress (WIP) schedule is a supplementary schedule. Whereas the three financial statements we’ve already discussed are produced by every company that complies with GAAP, a WIP schedule is a financial statement unique to the construction industry.

A WIP schedule documents the progress of a given project. Construction accounting works on a percent complete basis. If a firm has recognized 80% of the costs associated with a project, it can consider the project to be 80% complete and can therefore recognize 80% of the revenue. Financing partners rely on your WIP schedule to assess project progress, and they play an important role in the surety bonding process.

The WIP schedule displays the costs incurred on every project and documents how much revenue has been collected. Contract assets and liabilities are also recorded here and must tie back to the amounts reported on the balance sheet. Retainage (a percentage of the contract value that is held back until the work is completed) is also disclosed in the WIP.

To learn more about the WIP Schedule, check out our dedicated guide .

James Moore: Experienced Construction Accounting Firm

Accounting for construction companies can be a complex undertaking, particularly for large, well-developed firms working on multiple projects simultaneously. Without the right financial reports, firm leaders are effectively guessing every time they make a major financial decision. It’s an approach that can prove costly — both in terms of accounting errors and higher bonding premiums.

By investing in creating these financial statements internally on a routine basis, firms can shine a light on their financial position. That helps leaders make important decisions with a higher degree of confidence, unlocking the potential for future growth.

At James Moore, our dedicated construction CPAs work closely with construction firms around the nation. Our team is equipped to provide support to firms through audit and assurance services and also works closely with a range of construction companies to provide outsourced accounting services that help leaders better understand their financial position.

To learn more about our accounting services for construction companies, contact us today.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.