A contractor can have a strong backlog, busy crews and plenty of invoices going out while profitability is quietly moving in the wrong direction.

That is one of the challenges of running a construction business. Costs may be incurred weeks before they can be billed. Additional work may begin while a customer is still reviewing a change order. And a project that looked profitable at the start can lose margin before the issue becomes obvious.

Strong construction accounting processes can help identify those problems earlier. Three areas are particularly important: job costing, change-order management and work-in-progress (WIP) reporting. When these processes work together, they can give management a clearer picture of project performance and help identify potential issues while there is still time to respond.

Start With Reliable Job Costing

Accurate job costing is the foundation of useful construction reporting. Tracking costs by project helps contractors understand where project dollars are going, but additional detail can provide even greater insight.

Depending on the business, contractors may track field labor, materials, subcontractors, equipment and other direct costs separately, with additional detail by project phase or cost code. This can help management understand not only that a project is over budget, but why.

For example, if labor is significantly over budget while material and subcontractor costs remain close to expectations, management can focus its attention on potential productivity, overtime or estimating issues.

Timing matters too. A project may appear more profitable than it actually is if vendor invoices, payroll or subcontractor commitments have not yet been captured in the accounting system.

Regularly reviewing job costs with project managers can help ensure the information is complete, timely and reflective of what is actually happening in the field.

Keep Project Forecasts Current

Job costs tell you what has already happened. An updated estimate to complete helps show where a project is headed.

Project managers are often the first to know when productivity is slipping, material requirements have changed or subcontractor issues may increase costs. Establishing a regular process for communicating those changes to accounting can help keep financial reporting aligned with current project expectations.

For many contractors, a monthly review provides an opportunity to revisit estimated costs to complete, labor assumptions, subcontractor commitments, unrecorded costs and expected gross margin.

Contractors should also pay attention to margin fade. If a project’s expected margin continues to decline, understanding what is driving the change can help management determine whether the issue relates to estimating, execution, scope changes or a combination of factors.

Reviewing these changes regularly gives management an opportunity to address issues before they have a greater impact on project profitability.

Keep Change Orders Visible

Change orders sit between project operations, billing and accounting, making them a common source of financial surprises.

Additional work may begin before pricing or formal approval is finalized. In the meantime, labor, material and subcontractor costs continue to accumulate. Without a consistent process for tracking that work, contractors may not have a complete picture of the project’s costs, billing position or profitability.

A shared change-order log can help operations and accounting track additional work from the initial request through final approval and billing. It can also provide visibility into expected revenue and costs, outstanding approvals and items that may require follow-up.

This gives management a clearer picture of work being performed without final approval and whether unresolved changes are beginning to affect billing, cash flow or project profitability.

Use WIP Reporting to Bring It All Together

The WIP schedule brings together job costs, current estimates, revenue and billing to provide a broader view of project performance.

Underbillings and overbillings are an important part of that review, but the numbers alone do not tell the whole story.

An underbilling may simply reflect a timing difference between when work is performed and when it can be billed. In other cases, it could point to a missed billing milestone, unresolved change order or costs accumulating faster than anticipated. Sustained underbilling can also create cash-flow pressure when a contractor is funding work before collecting for it.

Overbilling, on the other hand, can benefit cash flow, but it should not be confused with profit. Some of that cash may still be needed to cover the remaining costs required to complete the project.

Understanding why a project is underbilled or overbilled can help management determine whether the position reflects normal timing or points to a billing, forecasting, change-order or cash-flow issue that deserves attention.

Make WIP Review a Team Effort

A meaningful WIP process involves more than the accounting department. Accounting knows what has been recorded and billed. Project managers understand what is happening in the field. Estimators know the assumptions behind the original budget. Leadership has insight into the company’s broader cash needs and project portfolio.

Bringing those perspectives together through regular WIP reviews can provide a more complete picture. Rather than giving every project the same level of attention, contractors may want to focus on projects with:

• Significant changes in projected margin
• Large underbilling or overbilling positions
• Substantial unresolved change orders
• Changes in estimated costs to complete

For those projects, management can consider what has changed, what is driving the current billing position and whether the financial forecast still aligns with what the project team is seeing in the field.

The goal is to make sure information from the field reaches the financial reporting process while there is still time to respond.

Make Sure the Numbers Tell the Same Story

Job costing, change-order management and WIP reporting each provide a different piece of the same picture.

Job costing shows where the money is going. Updated forecasts show where the project is headed. Change-order controls keep changes in scope and contract value visible. WIP reporting brings those pieces together to show their impact on revenue, billing, expected profit and cash flow.

When one area is incomplete or outdated, the others become less reliable.

One practical exercise is to compare the job-cost report, change-order log, current estimate to complete and WIP schedule for several of your largest active projects. Ideally, each should tell a consistent story about how the project is performing. If they do not, the differences may point to areas that deserve a closer look.