A Contractor’s Fall Accounting Checklist: A Guide to a Smooth Year-End Close

Baseball legend and (I suspect) accounting savant Yogi Berra once wisely observed, “If you don’t know where you’re going, you might not get there.” This raises an important question for those of us in the accounting world: Do you like surprises? For most, the answer probably depends. When friends throw an unexpected party or an underdog football team pulls off a massive upset, those surprises are likely festive occasions. When it comes to year-end financial reporting and audit season, however, surprises are rarely a welcome development. With this in mind, here are some proactive steps to take this fall to ensure the year-end financial reporting process is smooth and predictable.

Review for Contract Items That Can Produce Unique Accounting Outcomes

If an organization uses the percentage of completion method to record revenue, then items like uninstalled materials, variable consideration (such as pending change orders), and costs of waste and rework can cause wrinkles in their project accounting. Identifying the existence of these items is half the battle, so one should make sure their accounting and operations teams are communicating with each other regularly.

Monitor the Status of Over and Under Applied Indirect Costs

There are few things more unsettling to project managers than large indirect cost reallocations hitting their jobs at year-end. By monitoring the status of over and under applied indirect costs regularly throughout the year, one can more readily identify imbalances and make the appropriate adjustments before they become significant.

Dashboard Covenants

If an organization’s bank requires compliance with certain year-end metrics, it is prudent to calculate these internally as of October and November to ensure they are on track to meet these requirements. Maintaining a monthly dashboard of key ratios will help assess the overall health of the business, equip one with the knowledge to have proactive conversations with stakeholders, and inform strategic course-corrections as one heads into a new year. The following ratios are especially worth consideration, as banks and bonding companies tend to favor them in their analyses, as well:

• Working Capital and Working Capital Compression
• Current Ratio
• Underbillings to Working Capital
• Average Days in A/R
• Debt to Equity
• Debt Service Coverage

Plan Intentionally for External Deadlines

Given the multitude of third parties who review a contractor’s audited financial statements, it is wise to take time prior to year-end to identify the various submission deadlines imposed by creditors, bonding companies, pre-qualifications, and other external stakeholders. By approaching year-end with the knowledge of these dates, one can set the interim milestones necessary for achieving these end goals.

When in Doubt, Communicate

If a company undertook any new or unique transactions this year, they should take the opportunity this fall to discuss them with their auditor and bank to ensure everyone is apprised of the accounting treatment. Taking this step and the others outlined previously put any organization right on track for a successful and unsurprising year-end financial reporting season. Yogi would be proud.

For more information about McKonly & Asbury’s Architecture, Engineering, and Construction (AEC) experience, visit the AEC Industry Page and don’t hesitate to contact a member of the AEC team.

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