Those familiar with construction accounting understand the importance of a jobs schedule which encapsulates what makes construction accounting different from all other types of accounting. It is the place where revenue is calculated over time (percentage of completion method).
As an auditor I get to see job schedules from a variety of size and type of construction companies. Unfortunately, I see construction companies that still have a tough time getting this schedule right.
What should be included in a jobs schedule?
Many specialized construction accounting systems do not do a particularly good job of producing an effective jobs schedule. This can be due to system design, capabilities, or simply because it takes too many resources to maintain a current schedule in the system. Therefore, some companies maintain a schedule outside of their accounting system, typically in Excel.
Whether a system generated or an outside schedule is used, an effective jobs schedule should include information that is relevant for financial reporting and to monitor jobs individually.
There are many variations of a jobs schedule, however to have an effective schedule the schedule must include the following four pieces of information for each job:
- Contract amount
- Estimated cost to complete
- Costs to date
- Billings to date
With these four pieces of information, the following can be calculated for each job and should also be included in the jobs schedule:
- Contract revenue
- Estimated profit
- Costs and estimated earnings in excess of billings (Underbillings)
- Billings in excess of costs and estimated earnings (Overbillings)
- Backlog (remaining performance obligations)
For financial reporting, a schedule that includes all the fields above will provide the following:
- Revenues from contracts
- Contract asset balance reconciliation (underbillings)
- Contract liability balance reconciliation (overbillings)
- Backlog – for disclosure purposes
For managing jobs, a schedule that includes all the fields above will provide the following:
- Gross profit (to evaluate performance)
- Backlog (to evaluate progress)
- Other indicators (see previous blogs to learn more about how to read job schedules)
Here are some common errors in jobs schedules.
Not Reconciling Total Revenue to jobs schedule
Simply ask yourself “How do I know that my total revenue is correct?” or “Am I missing any jobs from my jobs schedule?” A simple revenue reconciliation to the jobs schedule will help answer these questions. Also, an auditor will need this reconciliation to ensure a complete population of all the jobs to ensure proper revenue testing.
Completed Contracts Missing
Some companies prepare a schedule that only includes jobs that remain open at period end and discard all information when the job is completed. However, contracts that are completed during the period should also be included to reconcile the company’s total revenue to the schedule and to evaluate changes in estimate that may require disclosure.
Readers of the financial statements that want to be informed about a company’s ability to use estimates will need a schedule that includes completed contracts. Bond companies, auditors and some financial institutions want to evaluate how a job progresses from original estimate to final performance. This gives them a history of a company’s ability to estimate profits.
Revenue vs Billings
Because it is important to reconcile total revenue to the schedule, it is important to understand the difference between revenue and billings. I see this error most often when companies are reconciling total revenue for the year and must account for some contracts that carryover from the prior year. Instead of backing out prior year revenue, companies back out prior year billings in error and are unable to reconcile revenue.
These are just a few common errors. See my next blog as we dive right into other common job schedule errors which will include job losses and negative backlog. If you have any questions, contact your Henry+Horne advisor.
Abel Coronel, CPA