By David Jean of Albin, Randall & Bennett (ARB)

Starting a construction company without a financial strategy rooted in smart accounting basics is like starting a build without a floor plan. Many of the decisions made early on can significantly impact the construction company’s finances and ongoing success. It’s probably safe to say that a desire to join the paper-pushing office hustle wasn’t the driving force behind the decision to start a construction company. But, if the new contractor develops and implements the right strategic financial and tax plan, administrative duties don’t have to overshadow relationships with customers or the ability to work hands-on in the field.

NASBP bond producers can help clients (and potential new clients) start a construction company by implementing accounting best practices. Here are six questions producers can ask clients who are in the early stages of the construction company’s set-up. These will help the new contractor to leverage a few accounting basics to minimize tax exposure, reduce costs, and increase profitability.

1. Will your choice of entity type support your personal and business goals and in a tax-efficient manner?

The variables and considerations for choosing the right entity type are vast, and each entity type has its own benefits and drawbacks. A contractor must determine what’s right on a case-by-case basis to comply with applicable laws and meet the owners’ personal and business goals for legal liability, financial responsibility, management structure, and transferability of funds in the most tax-efficient way.

But understanding the way each entity type is taxed goes a long way in helping to develop the company’s strategic financial and tax compliance plans accordingly. The company’s entity type selection doesn’t always write the company’s tax fate in stone. Many entities can elect to be taxed differently at the federal level. For instance, an eligible LLC can make an “S” election on Federal Form 2553 and elect to be taxed as an S corporation or file Federal Form 8832 to elect to be taxed as a corporation, partnership, or disregarded entity.

2. Are you set up to maximize cash flow, monitor your financial standing, and accurately assess and project your working capital and liquidity needs?

Because many construction costs are paid in advance, monitoring billing and receipt of payment to maximize cash flow takes on a higher level of importance. A contractor can build regular A/P and A/R review procedures, such as weekly reviews of aging reports, so the contractor can take corrective or preventive action when necessary.

Preparing financial statements, cash flow forecasts, and projections and measuring them periodically against the company’s actual cash flow will help to evaluate the company’s financial standing. Contractors can download our cash analysis tool below. We designed the following worksheet specifically to target the liquidity needs of start-ups and small businesses and assist them with projecting cash flow, forecasting for deficits, managing shortfalls, assessing working capital and liquidity needs, and determining their ability and need to borrow: Download ARB’s 13-Week Cash Flow Analysis Worksheet

Banking and surety bonding relationships are imperative, and maintaining those relationships requires a contractor to be transparent. Contractors must be proactive in surety and bank communications and, to the extent they can, approach new financial obligations with a mind to seek flexibility in the terms.

3. Do your job costing procedures align with an effective cost management strategy?

While watching sales and revenue numbers climb undoubtedly brings more joy, it’s vital to monitor operating and financial costs just as closely. A contractor’s fees need to remain in line with competitor pricing, and the contractor’s jobs need to generate enough revenue to exceed its costs. And the contractor’s costs will run the gamut from general overhead, labor, and materials for a specific project to the smallest box of nails in its inventory.

The contractor’s company will need job costing procedures that allow it to break down the labor, materials, and overhead cost allocated on a per-job and even per-project, division, or phase basis. Job costing allows a contractor to compile accurate data on actual costs over time, make estimates with greater accuracy and less risk, and analyze job profitability and performance. Tracking changes in these costs at the micro-level allows the contractor to make necessary pricing adjustments at the macro-level and make adjustments before taking a loss. A contractor’s job costing system should help account for things like an unexpected increase in the price of supplies or additional labor and equipment costs and capture scheduling and delay costs promptly to prepare for possible future claims.

4. Does your plan appropriately account for risk management?

Now, more than ever, it’s essential to take a step back from the competitive bidding landscape and adequately evaluate risk. A contractor should not let fear encourage a high volume of low-ball proposals. It should develop a project rating system based on the type of work, a predetermined minimum profit, bonding requirements, timeframe, and whether it has workers with the appropriate skills available. The contractor should prioritize the time and expense estimates associated with jobs that have the potential to provide the highest profit.

5. Does your strategy consider ways to leverage software, automation, and new technology? 

The cost associated with implementing technology and software can be significant, especially when a contractor is starting out. But  the contractor shouldn’t discount the return on investment over time. Advancements in technology have provided new opportunities for vertically integrated services. For example, structuring its operations to include distribution in-house or implementing prefabrication and modular construction can help reduce cost, boost efficiency in use of resources, and maximize job profitability.

A cost-benefit analysis may prove the projected time savings, increased efficiency, reduction in costs and risk, and revenue increases gained by automating manual processes with software programs worth the initial cost of implementation. For example, job costing software allows for real-time cost tracking, reduces risk, increases accuracy, and allows access to valuable reporting, such as cost-to-complete, budget to actual, and labor productivity reports. Asset management, project management, risk assessment, and customer relationship management programs also often yield a positive ROI.

6. Do you have the right professional service and advisory resources? 

Finally, when a contractor is starting his or her business, he or she also needs the right professional team to advise on business, legal, tax, and accounting intricacies that could affect the company’s operations, finances, and overall success.

David Jean is a Certified Public Accountant, Certified Construction Industry Financial Professional, CExP, and Principal of Albin, Randall & Bennett (ARB). He is also the Practice Leader for ARB’s Business Advisory, Construction & Real Estate, and Succession Planning Services Groups. Jean focuses primarily on financial accounting and consulting for construction, real estate, and manufacturing companies. He is a member of The NASBP Certified Public Accountant Advisory Council, an exclusive, 10-member council formed to serve as the resource team for the National Association of Surety Bond Producers (NASBP).