Not all CPAs are created equal when it comes to the construction industry. Did you know that the construction industry is unique in that it has its own Internal Revenue Code section? In our profession we regularly see financial statements that don’t make sense because a generalist CPA didn’t understand the complex requirements of construction accounting. In fact, frequently a lack of industry specific knowledge can actually harm a company — from understating bonding capacity and working capital, improper indirect cost allocation, or miscalculated bank covenant ratios. These inquiries can result in increased credit costs and lost opportunities. Here are some of the top reasons you should be utilizing a CPA team that specializes in construction accounting and reporting:
- Income is correctly calculated on the percentage-of-completion method, which is mandated as a generally accepted accounting principle.
- The financial statements include required contract schedules as supplementary information.
- The contract schedules appropriately tie to the balance sheet and income statement. Financial statements must show completed job revenue and work in process revenue that ties to total contract revenue on the face of the income statement. The same goes for costs.
- Correct terminology and classifications are used throughout the financial statements, much of which is unique to the industry, such as billings in excess of costs and estimated earnings (overbillings), and costs and estimated earnings in excess of billings (underbillings).
- Losses on uncompleted contracts are recognized in full at the time it is determined there will be a loss on a job. This is, again, mandated by generally accepted accounting principles. It also means that the financial pain of a loss is over and done with all at once, and not spread over the life of the contract, thereby prolonging further damage to financial ratios in future periods.
- Unique contractor disclosures are included with the financial statements, such as backlog, retentions receivable, contract billing status, significant profit fade or gain, contract claims, etc.
- An appropriate accounting method for tax purposes is selected to match the cash flow of the business. There can be many different tax accounting methods available to a contractor.
How do you evaluate a construction CPA? A good construction-focused CPA firm should have a dedicated team that specializes in the industry led by a partner or shareholder with a Certified Construction Industry Financial Professionals (CCIFP) credential. The firm should be a member of respected industry trade organizations, such as Associated Builders & Contractors (ABC), Associated General Contractors (AGC), and the Construction Financial Management Association (CFMA), just to name a few. And lastly, the firm should have a large construction industry client base and provide value-added offerings in addition to tax and assurance services, such as benchmarking, financial ratio assessment, and succession planning.
Locating and identifying a construction CPA is one of the most crucial and rewarding decisions you can make for your business. Once found, they should not only work with you to improve your business, but to improve the quality of financial information produced. A qualified construction CPA should support your ability to run a more profitable contracting business.
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Guest Blogger: Jones & Roth, Oregon’s Premier CPA & Advisory Firm.