Co-written with Halli Williams, CPA, CCIFP, Senior Manager for CBIZ CPAs, P.C.
Construction accounting is complex. Getting guidance on the expected time and capital investment, as well as a clear understanding of the role of a CPA in preparing compiled, reviewed or audited statements is imperative. In Part 3 of this three-part blog, Kelly Kimmel, Branch Bond Manager for Old Republic Surety Company and Halli Williams, CPA, CCIFP, Senior Manager for CBIZ CPAs, P.C., explain the schedules and disclosures the surety will be looking for as well as expected fees and timing.
What schedules and disclosures will my surety be looking for?
The surety is looking for a detailed and accurate statement that allows the underwriter to analyze data trends and answer questions on trends that are outside the norm for your company or for the company’s industry. Detailed notes and disclosures help the surety understand the reasoning behind the numbers and can provide insight into anomalies allowing the underwriters to confidently make decisions. In general, a complete statement will give the surety much of the information that they need to analyze the overall financial health of the company. Ideally, a complete statement includes:
- Cover Letter — A letter from the CPA, with no qualifications, that confirms the statement’s compliance with GAAP.
- Balance Sheet — Performed on a cost to cost (previously called percentage-of-completion) basis that ties in with other information provided.
- Income Statement — Costs broken down directly in the statement or in an additional schedule within the notes section (for example, direct cost make-up, allocated indirect costs, G&A costs, or other costs or income).
- Statement of Changes to Equity Position — Detailed account of contributions and distributions of ownership.
- Cash Flow Statement — Details on how cash moved through the company from the beginning of the year to the end of year due to operations and investments, for instance.
- Notes and Schedules to Include:
- Standard:
- Summary of significant accounting policies — This should confirm the nature of operations, operating cycles, how revenue is recognized, and how the company is taxed.
- Breakout and Age of Receivables — This should break out how much of receivables come from completed projects vs. contracts. Additionally, a breakout of the age of the receivables (current, over 60 days, over 90 days).
- Schedule Property and Equipment — A breakout of the depreciation calculations for the property and equipment.
- Breakdown of revenue earned vs billings, which nets overbillings and underbillings. The net of what has been billed in comparison to what has been earned.
- Breakout of the long-term debt on the balance sheet and payment schedule and maturity dates of these debts.
- Bank Line of Credit Information — Information on covenant compliance, balance, interest, and expiration date for bank line of credit.
- Miscellaneous relevant information — All other information that is material to the financial make-up of the company and the information making up the balance sheet, income statement and cash-flow statement.
- Subsequent Events — An account of material events that occurred from financial year-end until the CPA statements are finalized.
- Work-in-Progress and Completed Contract Schedules — Detailed schedules that outline the cost-to-cost calculation of major projects (possibly consolidating smaller projects) and how each contributed to the total revenue, direct cost and gross profit listed on the income statement, as well as the underbillings and overbillings as outlined on the balance sheet.
- Standard:
What should I expect to pay?
CPA-prepared Cost to Cost (previously Percentage of Completion) Financial Statements are labor intensive and require employees with expertise in the construction industry to complete. Additionally, fees can range widely, depending on how much work is required to adjust your company’s specific internal financial information to meet GAAP.
For example, the following are average beginning costs of each level of statement:
- Compilation: $2,000+
- Review: $15,000+
- Audit: $30,000+
The cost of obtaining a CPA prepared statement may cause sticker-shock, however, it doesn’t take many bonded projects for the review to pay for itself in discounted premium rates. Additionally, the cost is largely outweighed by the revenue opportunities that come with not only being able to target bonded projects, but by being able to approach owners, architects and general contractor pre-qualifications with a strong financial presentation and a letter that shows a strong bonding capacity. The reality is when your company sees requests for a CPA-prepared financial statement, they are likely looking at job opportunities exceeding $1 million.
With a reviewed statement costing between $15,000 and $25,000, this could be equivalent to less than 1% of the revenue on one job.
Additionally, when a construction company needs a CPA-prepared statement, their projects are often larger both in terms of contract price, as well as the length of time to complete the project. Having a third-party overview of internal controls and examination of cost records and profits can save thousands by establishing internal processes that could uncover job profit fade, which otherwise may have been impossible to see, and allowing contractors to make corrective adjustments early.
When should we start the process of engaging a CPA?
If you have never had an external CPA, there is a strong chance that you will need to make several adjustments to your internal controls and financial presentations for your CPA to issue assurance that your statement follows GAAP principles. Best practices include engaging a CPA as early as possible, even prior to the start of the financial cycle. (For example, if you want a December 31, 2025, financial statement, you should meet with your CPA in the fourth quarter of 2024).
Early contact with your company’s CPA firm allows them to gain an initial understanding and provide feedback on your internal corporate systems, which may save a substantial amount of time and money at the end of the year. It may even be beneficial to meet with your accountant quarterly, allowing you to adjust your numbers throughout the year. This can help with the annual review, but also help owners make better decisions during the year with accurate data.
How long does it take to get a CPA-prepared statement?
Similar to cost, the time frame is largely dependent on how quickly your CPA can coordinate with you to obtain needed information and how accurate that information is. A guide to estimated time frames are as follows:
- Compilation:
- Total: 2-4 weeks
- Review:
- Fieldwork: 1 week
- Wrap/Issuance: 4-6 weeks
- Total: 5-7 weeks
- Audit:
- Planning and Preliminary: 1 week 3 months prior to year-end
- Fieldwork: 1-2 weeks
- Wrap/Issuance: 4-6 weeks
- Total: 6-9 weeks
It doesn’t take many bonded projects for the review to pay for itself in discounted premium rates. Additionally, the cost is largely outweighed by the revenue opportunities that come with being able to target bonded projects and to approach owners, architects and general contractors with a strong financial presentation and a letter that shows a strong bonding capacity.
Continue reading:
Resources
https://www.ispartnersllc.com/blog/five-types-testing-methods-used-audits/
https://www.procore.com/library/construction-financial-audit
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