By Mike Andriola
When accountants hear the word “estimate,” most go into a panic. In an industry where accuracy and precision are paramount, the mere thought of a number not being exact can create a sense of unrest. However, in the construction industry, estimates are unavoidable. A slight one to two percent change in an estimate on a large contract could add or subtract a substantial amount of profit or loss to or from the bottom line.
At Wiss, we work with our clients to strike the perfect balance between aggressive and conservative accounting in order to prevent inaccurate estimates that could negatively impact their future performance. Managing the client’s goal of deferring taxes with the lenders’ focus on seeing strong earnings can sometimes come down to the precision of an estimate on an in-progress job.
To accurately forecast the results of your ongoing projects, use the following guidelines:
- Use completed projects to anticipate future results. Actual performance on previous projects will allow a contractor to set a baseline for expectations. Gross profit percentages on in-progress jobs should typically be comparable to completed jobs. If the two differ significantly, it’s important to understand why.
- Involve both the project manager as well as accounting personnel. It can be difficult to translate the industry lingo of a project manager into numbers and equally as challenging for an accountant residing in the corporate office to predict the results of a job from looking at a spreadsheet. By keeping the communication lines open between the field workers and the financial experts, the risk of missing an integral piece of information can be minimized.
- Double-check your approximations. If your estimate is considerably dissimilar to the actual end result, future financial statements will be forced to absorb the impact of this inaccuracy and financial forecasts will have to be adjusted. Thus, it is crucial to gauge your approximations accurately in order to have the ability to make sound business decisions.
Through performing a retrospective review of past cost estimates in the form of a gain/fade analysis, an analyst will see just how accurately costs to complete were estimated in prior years, so be certain not to take the task of completing an accurate contract schedule lightly. The financial future of the company and its reputation with its professionals could be dependent on it.
Mike Andriola is a Partner in the firm, servicing a wide range of clients in the construction, nonprofit, higher education, and governmental industries. Contact Mike at email@example.com or (973) 994-9400.