To provide accurate information about a contractor’s performance, the controller should take an active role in ensuring that monthly contract revenue is reported properly. Monthly job revenue reports should be generated, even if full financial statements aren’t prepared.

To accomplish this objective, controllers need to understand the intricacies and problems associated with different types of contracts (see article on page two).

Under- and Overbilling

Underbilling may indicate unrecognized losses. Overbilling may reflect underreported income by underestimating costs to complete, or a failure to accrue all costs incurred to date.

The controller should quantify the potential impact on current period earnings to determine whether further investigation is needed. He or she should speak with the estimator or project manager to determine if under- or overbilling was anticipated. If job cash-flow analysis has been maintained, the controller only needs to follow up on cash-flow variations.

Discussions with Project Managers

The controller should hold monthly discussions with project managers about any jobs that have a major impact on income. The discussion should focus on swings in profitability, impact of current production rates on cost to complete, and completion date. If a cash-flow projection was prepared, project managers should be asked about any significant variations in cash flow.

For less significant jobs, the same analysis should be performed quarterly. If your company does short duration jobs you usually won’t have to spend a significant amount of time reviewing them. Problem indicators on these jobs may require further inquiry or analysis, but only if the problems would have a significant impact on earnings.

Discussions with project managers should include questions about job problems and scheduling status (for labor and equipment, as well as subcontractors and material deliveries).

The project manager may have a large contingency in the cost to complete. Find out when that contingency is expected to be eliminated or at least decreased. Another important discussion point is how much of the contract is substantially complete. Many project managers reach 98% completion, but then don’t expeditiously close out the project. Convey to the project manager (or, if necessary, the chief operations officer) the importance of closing out the job, both financially and in terms of company resources. Also, analyze for reasonableness the amount of unspent dollars left in the contract versus the actual future committed cost.

It’s also important to ask about disputes, unsigned change orders, unpriced change orders, and extra or out-of-scope work. The project manager should make the controller aware of costs that will be incurred on such items so these expenses can be captured as they are incurred rather than separated or reconstructed later. This approach provides a much better negotiating position in pricing the change order or extra work, or quantifying claims in a litigation situation.

The Proactive Controller

The controller should be proactive in helping project managers analyze profitability and cost-to-complete. The purpose of meeting with project managers is to initiate a dialogue about each job and to better analyze their current status. The goal of these meetings is to find out what information project managers need to manage jobs better. The controller’s job is to structure the company’s reporting system to provide that information on a timely basis.

What Controllers Need to Know From Project Managers

• Job problems
• Scheduling status for labor and equipment
• Problems that might occur with subcontractors
• Concerns about material delivery
• When cost contingencies are expected to be eliminated or at least decreased
• Percentage of contracts that is substantially complete
• Existence of disputes
• Existence of unsigned change orders
• Existence of unpriced change orders
• Existence of extra or out-of-scope work