Better fade and gain tools to monitor construction contracts

Your guide to construction finance and accounting news

One of the important trends for contractors of all type is to monitor construction contracts fade or gain. This is an analysis, by contract, of evaluating your original estimated gross profit against your current or final estimated gross profit. Jobs that improve their margins from the original estimate are considered contract gains, and conversely jobs whose margins decrease are considered contract fades. Most of you reading this probably know this concept very well but the following are some recommendations that our best-in-class contractors have in regard to this analysis.

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How Often Do you Review Fades and Gains

Most, if not all contractors, will review job fades and gains at the completion of a job. That frequency is helpful to gather experience from your completed jobs in order to avoid pitfalls in the future or “what went right”. It also helps the estimators understand how they want to bid jobs in the future. What it doesn’t do is provide real time feedback to avoid significant fades at all. Our recommendation is company’s move from a “post-mortem” approach to a proactive monthly monitoring of fades and gains. Generate a monthly work-in-process schedule that includes a fade and gain from inception of the contract to date along with a month-to-month fade and gain. By including this in your monthly financial review, it will be easy to spot trends of job status and work with the project manager to understand what is actively happening in the field. Hopefully this allows for corrective action on a contract that is heading south or implement processes or insight gleamed from contracts that are going well.

Spotting Job Selection Trends

On a frequent basis, management should step back and look at the broad general trends of fades and gains in their contracts. Bad jobs happen to everybody but should be infrequent. Those should be anomalies. Generally, you should see small fades and gains in most of your jobs and occasionally the medium to large gains on jobs (we all know those PMs sandbagged their estimates). However, when you start identifying more frequent and significant fades it could be likely it is job selection all together. Are you pursuing work that is outside your expertise, geography or type? While it’s difficult in a robust construction economy to say no to work, take a long, hard look at what you’re bidding on before you submit that bid. The best job might be the one you didn’t pursue.

Fade/gain analysis is just one tool in managing your business. If you want to discuss this or other metrics associated with the construction industry, contact us. We are happy to provide templates or serve as a sounding board ranging from strategic issues to day to day operations.

Matt Waller, CPA