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 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. However, best practices recommend preparing these statements far more frequently — for example, monthly or at least quarterly. Doing so not only helps you run your business more effectively but 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 project profitability or plan for the future. Many firms rely solely on their cash balance or the owner’s intuition, unreliable measures that can result in precarious financial positions.

There are four essential financial statements that construction companies should produce regularly: a Profit and Loss Statement (or Income Statement), Balance Sheet, Cash Flow Statement and a Work In Progress (WIP) Report. This article provides an overview of each, highlighting the critical details construction firm leaders need to understand to build for financial success.

Profit and Loss Statement

A profit and loss statement, also known as an income statement, displays a company’s revenue and expenses over a specific time period (typically a month, quarter or year). This report shows whether your construction company was profitable and is usually the first financial statement reviewed by stakeholders.

The statement begins by listing the revenue recognized during the accounting period. From there, it subtracts costs, which are divided into several categories. The remainder is your firm’s net profit.

If your firm manages multiple jobs simultaneously, preparing individual P&L statements for each project helps reveal profitability at the project level. This requires the allocation of indirect costs like payroll and insurance to each job.

Construction companies can use these reports over time to monitor changes in profitability, cost trends and performance across project types.

Balance Sheet

A construction company’s balance sheet presents its assets, liabilities and equity at a single point in time, usually at the end of an accounting period. This document illustrates the company’s net worth and is essential for evaluating creditworthiness, especially for surety bonding.

Assets listed include cash, accounts receivable, contract assets (formerly called under billings) and fixed assets like equipment. Liabilities comprise accounts payable, contract liabilities (formerly over billings) and outstanding loans. These figures must align with your firm’s WIP schedule.

Equity is determined by subtracting liabilities from assets. Depending on your company’s structure, equity may include retained earnings, investments and net income.

Cash Flow Statement

A cash flow statement tracks cash inflows and outflows, categorized into operating, investing and financing activities. Construction companies may also include disclosures for non-cash activities like new debt.

Because large construction projects are cash intensive, it’s critical for leaders to track accounts receivable, accrue charges accurately and forecast future needs to avoid liquidity crises. Reviewing these statements regularly can help identify overspending and inefficiencies.

Larger construction companies often prepare project-level cash flow statements to monitor financial performance on individual jobs.

Work In Progress Schedule (WIP)

The WIP schedule is unique to the construction industry. Unlike GAAP-required statements, this supplementary report tracks the progress of active projects using the percentage-of-completion method.

For example, if 80% of a project’s costs have been incurred, the firm may recognize 80% of the contract’s revenue. Sureties and financing partners use the WIP schedule to assess progress and risk.

The WIP includes incurred costs, recognized revenue, contract assets and liabilities and retainage (withheld contract funds until project completion). All values must reconcile with the balance sheet.

To learn more, read our article that details maintaining WIP schedules.

James Moore: Trusted Accounting Partner for Construction Companies

Accounting for construction companies is complex, particularly for firms juggling multiple long-term projects. Without the right reports, leaders are left making major financial decisions in the dark. It’s a risky approach that can lead to costly errors and higher bonding premiums.

Producing timely, accurate financial statements empowers construction companies to operate with confidence, identify opportunities for growth and strengthen financial stability.

At James Moore, our dedicated construction CPAs work closely with construction firms across the country. From audit and assurance services to outsourced accounting support, we help businesses understand their financial position and make data-driven decisions.

Contact a James Moore professional today to learn how we can support your construction company.

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.