As a construction professional, financial statements likely aren’t your favorite part of the job.
They are, however, a necessary part of securing working capital for many contractors and construction companies.
An income statement is a financial document that provides crucial fiscal information about a construction company’s history and project performance to:
This article will help you understand what the main components of an income statement for a construction project entails, along with when and why they are used.
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In the construction world, an income statement is a summary of the results of a company’s operations and profitability for a specific period of time.
This report is one of the most common in construction and will typically cover a specific period of time, usually:
Also commonly referred to as the profit and loss statement, or P&L, an income statement will generally include:
Financial statements are the most common source of a contractor or construction company’s historical performance.
An income statement is a type of financial statement for contractors and is often used to analyze the contractor’s business when determining:
Construction companies use income statements and other financial statements to prove their company’s creditworthiness to:
Looking at a company’s income statement, sureties are able to compare a contractor’s finances year-over-year and period-over-period.
Sureties will look for:
… and compare a company’s operational success to other companies in the same market.
As a contractor, positive cash flow is of the utmost importance. And you’re likely painfully aware of the cash flow problems that are rampant in the construction industry.
Financial statements (including an income statement) can assist construction companies and contractors:
An income statement, in particular, can be extremely insightful for a construction company when analyzed over a few months or years.
Any spikes or dips you notice could point you to problems or trends in revenue you may not have been previously aware of.
Understanding why these changes happened (ie. a certain time of year) can help solve any potentially worrisome trends and prepare a company’s finances for the future.
Moreover, financial statements can also help contractors get paid on time and make more profitable long-term financial decisions.
For example, if a company is experiencing cash flow problems, an income statement coupled with additional financial statements can often help them get access to working capital at lower interest rates.
This move reduces carrying cost and works to improve the company’s bottom line.
To really reap the benefits, income statements should be reviewed regularly. Comparing numbers month to month will allow you to spot potential errors and analyze trends.
The major components of an income statement are:
These elements together help to show whether a company or construction project was profitable.
We’ll review these in depth below and outline what exactly goes into each of these components of an income statement.
All construction contracts have unique types of profit structures, including the following contracts:
Because revenue is determined differently with each of these construction contracts, they all require their own analysis to understand how a contractor or construction company is actually performing.
To comprehend the risk related to the accuracy of the financial statement, a company or contractor must note how much of the revenue is based on estimates.
The higher the revenue amount that is based on estimates, the higher the chance of the revenue being inaccurate, whether over or understated.
The way to ensure the income statement is as accurate as possible is by illustrating the cost of each type of revenue earned.
This will help demonstrate the true source of the company’s profit.
The purpose of the cost of revenue earned is to determine and state a contractor or company’s gross profit.
Cost of revenues earned is usually considered to be a variable cost, meaning it will either increase or decrease based on the…
… performed by the contractor.
The true cost of revenues earned is made up of both direct and indirect costs. We’ll review what qualifies as direct or indirect costs shortly.
The formula to calculate gross profit from an income statement is fairly straightforward:
That first leftover amount is the gross profit.
To find the operating income for the period of time, subtract your general and admin expenses (office supplies, admin salaries, etc.).
Finally, to find the net income or loss for the period of time, add or subtract …
The definition of a direct cost is any cost that can be directly associated with the project.
On an income statement for a construction project, direct costs may include:
Any cost that can be directly traced to a particular project should be included in direct costs.
Any items that are not directly related to the performance of the work should be considered indirect costs.
These costs may include:
Indirect costs can commonly be a source of inaccuracy on an income statement.
Two mistakes often made are:
If the latter happens, the contractor or construction company would be overstating the gross profit and the SG&A, resulting in an inaccurate income statement.
Contractors and companies should analyze and quality check indirect costs frequently as they can change over time.
By catching any potential mistakes early, a contractor may be able to:
Selling, general, and administrative costs (or SG&A costs) are the expenses related to running the “back office” operations of a construction company.
These costs might include:
Generally speaking, SG&A costs are fixed, since they neither increase or decrease with revenue and are incurred regardless of whether the contractor has booked current or future work.
Working to keep selling, general, and administrative costs to a minimum may help increase a company’s profitability.
Accurate expense tracking is essential to an accurate income statement.
But manually inputting and reviewing each and every direct and indirect cost leaves a lot of room for error.
Let Flexbase help you out.
Schedule a demo today and make sure your next income statement is right on the money.
