Year-End Close for Contractors: Check Your Numbers Before You Pay Bonuses

0:00Kathe Barrington: You've paid the Christmas bonuses, then January hits, more job costs come in, and the profit you thought you had starts disappearing. That's an expensive way to find out your books were wrong. Welcome to Construction Genius. This is episode nine in our Construction Accounting Series with CPA Kathy Barrington. Today, we're tackling your year-end close. We get into jobs close too early, pending change orders that inflate your profit, and adjustments that can leave your bank questioning your numbers. Kathy also shares the story of a job that took 11 years to close out. Before you decide how much money you can spend, distribute, or pay in bonuses, you need numbers you can trust.

0:44Kathe Barrington: So let's dive right into it. This is Eric Anderton, and you're listening to Construction Genius, a leadership masterclass. Thomas Edison said that genius is 1 % inspiration and 99 % perspiration. If you're a construction leader, you know all about the perspiration, and this show is all about the 1 % inspiration that you can add to your hard work to help you to improve your leadership.

1:17Kathe Barrington: Kathy, welcome back to Construction Genius. Hi, Eric. Good to see you. Hey, you know, it's October the 2nd. And so the purpose of today's episode is really to dive into what a well-run year-end close looks like for a contractor. So let me just ask you a question. What does a well-run year-end close look like for a contractor? And when should preparation begin? in. I'm going to go out on a limb here and say preparation should begin in January if you're a December year end, right? You have all the amazing SOPs that we've talked about in previous podcasts, and you've got it all dialed in for your month end close or your quarter end close.

2:00So year end close is really just a final audit and a cleanup and putting a bow on everything is really what I see your end does. Yeah.

2:11Kathe Barrington: And so it's vital that you go back to the various episodes that we've done. We've done a series here and there'll be links in the show notes. And it's interesting. It seems like it's a trip. I was visiting some relatives just recently and they're all, you know, they're older, they're in their eighties. And I was thinking about how their current physical state is a culmination of the choices that they've made over the period of their lives, which is kind of a sobering reflection. And analogizing that to a year-end close for a construction company, your year-end close is only as good as your monthly and your quarterly closes, from what you're saying.

2:45Yes, absolutely. All those processes that you have worked so hard to build, the year-end close is really like the culmination of that. And your year-end close, if it's difficult or smooth, is also a lot of information on if you do have difficulties, then really assessing where your SOPs might need to be worked on some more.

3:09Kathe Barrington: That's interesting because, you know, you get a lot of times, I'm sure, contractors who just kind of suck it up and grind through the year-end close because they've got to do that to avoid tax issues or whatever. And then they kind of just blow off what it's telling them to do in terms of fixing stuff and just move on and wait for the next year-end close with additional headaches. Do you ever see that? Yeah, absolutely. One of the things that I look at very closely when I first take on a client is how many journal entries are they getting from their CPA firm? All of mine get reviews. So when they get reviewed statements, they have true up entries for GAAP and all sorts of things.

3:48And I want to look at what those entries are because my goal is to only have a tax adjustment at year end. So if I only have a tax adjustment at year end, then I feel like I've done my job and my part. And our SOPs are really good throughout the year because you want to know where your numbers are at and you don't want to have your CPA firm making a bunch of adjustments for you.

4:14Kathe Barrington: Yeah, so that kind of speaks in a certain way to folks thinking about how proactive is their CPA, their current CPA, and actually helping them through this process and shouldering a little bit of the burden and shepherding them through doing what they need to do in order to have a smooth year-end close. Yeah, exactly. What records and schedules should a contractor have ready before the CPA starts? Well, if you do get a reviewed statement, then you're going to have to provide support for pretty much your entire balance sheet and your job schedule. So those are pretty intensive closes. So you definitely want to make sure you have all that.

4:50And that's what I work on and a controller or CFO should be working on. So those things are pretty much what is needed for that level of close.

5:01Kathe Barrington: And how do you verify that the year-end WIP schedule reflects accurate job costs and realistic estimates to finish? So depending on how tight their close cutoff date is after year end, the closer you get to year end, the more due diligence, in my opinion, you really need to do. Because if you wait a little bit longer and for a few of my clients, we do wait a little bit longer than normal. So if the close is on the 15th, then maybe we might push it out to the 20th. But I also have clients that are pretty tight. So what we do and want to make sure is I'm looking at the job costs that are hitting in the following year.

5:42So if we're working on closing out a bunch of jobs and I look at those jobs in the following year. So in January, it's going to be 2027. I'm looking at those. And if I see a bunch of costs hitting jobs that they want to close out, then there's going to be a question of, hey, do we have SOP issues? Do we have cutoff issues? Why are we closing out jobs that we continue to have closed job costs on? So if they're closed, the costs should have already been in in the prior year. Do we have cleanup to do? What's going on? So looking at what's going on currently and having that hindsight is really important.

6:21Kathe Barrington: How should pending change orders, disputed claims and projected job losses be treated at your end? So job losses should always be taken as soon as you know them. So regardless of it being year-end or not, because you are required to take that loss up front. So if you know it's a loss, you've got to post it. But pending change orders and those sorts of things, you should be looking at everything from, in my opinion, a conservative lens. If you're closing out jobs, then you don't want to close those out if you've got pending anything, in my opinion. But if you are erring on the side of being more conservative, then you should be careful about the pending job change orders that you're putting on the job to not take in more revenue than you need to.

7:10Because what ends up ultimately happening, if you're too aggressive on capturing profit that might end up as fade later, you're going to start off your year with a hole. So you're starting at zero in your new fiscal year. So if you're taking losses on jobs in the beginning, now you've got a bigger hill to climb. So you really have to look at your numbers very closely.

7:36Kathe Barrington: So you use the phrase conservative lens. How would you define a conservative lens? If your normal cost or project profit is like range of 18%, 20%, don't go full in 30 % on a job that you've got a bunch of pending stuff on. So again, all the things that we've talked about up to this point, right? But with year end, you want to get in more of those details and really make sure that your numbers are right. and you're not trying to like, oh, it's year end. I want to take in more profit. I want to do this because you might be doing that to look better at year end. But now you are actually hurting your next year.

8:19Yeah.

8:19Kathe Barrington: And we may have covered this a little bit, but how do you make sure revenue and costs land in the correct year, especially on jobs still underway? That's exactly it. Making sure your budgets are right. So those SOPs on the project manager meetings and all of the things that you're doing on a regular basis to make sure you know what your numbers are. And at year end, if you're in doubt, always err on the side of, I'm going to put a little bit more Christian in that job. Yeah, it's awesome. All right, quick break to talk about my book, Construction Genius. This is what I want you to do. Go to Amazon, search for the book, read all of the five-star reviews, because there's a ton of them.

9:05Kathe Barrington: Over 50, to be precise. And the reason I want you to read them is because real people wrote those reviews who've actually read the book. And it'll give you an idea of why you should go and buy a copy right now on Amazon. And here's the deal. If you purchase 10 or more copies for your company, and then send me an email, ericatconstructiongenius.com, I'll come in via Zoom and do a one-hour Q &A and a bonus training session with your team at no charge. I normally charge$4 ,500 for an hour of my time. And again, for you, I'll do it at no charge if you buy 10 or more copies of my book. And the reason you should buy it is all in the title.

9:43Kathe Barrington: It's effective, hands-on, practical, simple, no BS, leadership, strategy, sales, and marketing advice for construction companies. So if you're in the construction industry, this book is for you. So you can get it on Amazon. You can also get it on Audible in the audio version as well, narrated by yours truly, and I know you'll really enjoy it. So go out and get the book. And now, back to the interview. What needs to be reconciled in receivables, retainage, payables, and subcontractor balances before closing the books? And closing the books should be no different with any of your closeouts. Where it becomes more important is those jobs that you do want to technically close out.

10:25The biggest issue I always run into in the following year are closed job costs. So jobs that are being closed out or every once in a while, it'll be like, oh, well, we had to reopen this job because they put a change order on it. So really asking the questions of, am I 100 % confident that this job is closed out? There's going to be no additional work on it. It's better to leave it open than to be aggressive in closing it out. What is an example of a job that just took the longest amount of time to close out?

11:05Kathe Barrington: Can you think of one off the top of your head with one of your clients? 11 years. 11 years. Why was that? The GC was a nightmare. The jobs ended up in a lawsuit. It was just kept dragging on and the GC wouldn't close them out. And it just ended up in a nightmare. Literally 11 years. What did your client learn from that? Not to work with that GC. Hey. Pretty much. I mean, that's really all, you know, came of that. It wasn't, you know, the type of work or anything. It was literally down to the GC. It's interesting. I mean, we laugh at that, right? But it seems like some contractors are gluttons for punishment.

11:46Kathe Barrington: And even though they have a crap GC or a crap owner, sometimes they go back to them, you know? Yeah. Yeah. I take that as information. And if you have a nightmare job with somebody, you might really want to consider it because if it ends up being in a loss or a lawsuit, then your risk, I think, is too high to be working with them again. Yeah. Yeah. What commonly gets missed when closing out payroll, equipment and overhead costs? Payroll, not so much because that is such a time sensitive thing that it's really difficult to miss anything on that level. Fixed assets, also not really a ton aside from maybe some fixed asset cleanup that needs to happen where you haven't scrapped stuff off or anything like that.

12:28But usually that's kind of zero value at that point. Where I see the most amount of issues was like I was saying is just having things hit the following year of costs that were missed. It's very rare for it to be those change orders to the positive side, but it's usually those closed job costs that end up really hurt.

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14:14Kathe Barrington: And I guarantee that it will transform your leadership. If it does not, you take the whole course and you didn't get benefit from it. You just send me an email, eric at constructiongenius.com and I will cheerfully refund you 100 % of your money. I'm really confident this course will transform your leadership. So again, go out to the website, theshift.constructiongenius.com, learn more about the course and start taking it today. How do you reconcile financial statement profit with taxable income so the owner understands both? If you're a large enough contractor, I believe it's about$32 million now where you have to be accrual and percent complete, then your books are generally pretty close to where your tax basis is going to be.

15:03If you have any carry forwards and things like that, then that obviously changes things. Where it gets a little bit more complicated are the smaller contractors that are possibly cash basis for tax or completed contract. And that's, again, where you want to be really careful with making sure you're not closing jobs out prematurely because you're going to end up taking that entire profit in for tax purposes. So taking a look at all of that and doing a little bit of a projection of, hey, this is what's going to happen if you close out all of these jobs. And generally at this level, working very closely with the tax person, because I am not a tax person.

15:43I don't do taxes. And I leave that to the professional that does them. So I work very closely with those people to make sure we know where the numbers are. Yeah.

15:53Kathe Barrington: And what year-end adjustments could raise concerns with the contractor's bank or surety, and when should those conversations happen? So for me, it's always difference between the internal financials and meaning the financials that I produce or your controller or CFO are producing for bank and bonding compared to the reviewed statement later or your tax return. If you're not getting a reviewed statement, you don't want changes from your internal statement that you can't fully explain. So that's where it becomes really concerning is you provide internal financials. And now all of a sudden, your financials that you give them three months later with the review statement are significantly off.

16:36And if your answer is, oh, we had a ton of adjustments, the integrity of your internal financials are going to be shot.

16:44Kathe Barrington: What are the most common mistakes that delay a contractor's year-end close? And who should be accountable for preventing those? Having job issues. So in that sense, it's going to be a combination of project manager, obviously the owner, making sure the owner knows what's going on, having those meetings, and just making sure that all the information is on the table. So that's where the biggest amount of risk is, is on those jobs. Okay. So as we close up here, this is really great. Again, October 2027 or 2026, top three things someone should do right now to get ready for that year-end closeout and to make sure it goes smooth.

17:24Make sure your Q3 numbers are on point. Get them as close as possible. Start working on what jobs you're looking at closing out. So looking at all of those things and having good enough information that you can extrapolate through year end. And so then you can talk to your tax person and decide, you know, I need this excavator. It doesn't make sense for me to buy it this year. All of those little questions that you might have, or what should I do? Should I pay off my line of credit? All of the certain things that like, you know, might be important for your year end statement. Where do I need to have cash?

18:00All of those things should be looked at starting Q3 and making sure your close is done timely enough so your Q3 numbers can be looked at. Like you shouldn't be looking at this on December 15th. Right. If you have a December 31st year end, you're going to want to start looking at this in October and November so you have enough time to plan and also give your tax person enough time to look at it. You know, don't make it a fire drill for them.

18:29Kathe Barrington: Yeah, that's excellent. So over Thanksgiving, you should be chilling instead of stressing about your year end close if you do some work up front now. Yeah. And bonuses, right? If you are doing well and you want to do bonuses, those are usually done in December for holidays. So you want to make sure you have good enough numbers too, to make those decisions. So you don't give a bunch of bonuses and then take a bunch of hits at your end. Dude. Yeah. I got that. Yeah. That makes the Christmas party sadder than you were anticipating. Yes, absolutely. It's beautiful. Thank you, Kathy. So tell us a little bit more about yourself, just remind folks who you are and how they can get in touch with you, please.

19:08I'm Kelly Barrington, CPA. I've been doing construction stuff probably for about 22 years now, accounting itself for over 30. And I've been helping contractors just make sure that they have the level of stuff that they need from controller or CFO if they don't have a strong enough person in-house. My website is kbcpa.biz. And I have links there for LinkedIn or Facebook, ways that you can contact me. So I'm Googled.

19:37Kathe Barrington: Beautiful, beautiful. And one thing to do, actually, check out yourself on chat GPT or Claude or Gemini, because that's a place where people are looking at the moment. Yeah, it's interesting. Very interesting. Yeah, I know. I searched on it today and I saw where I came up and I was like, well, that's pretty cool. Nice. Okay, that's a good one. Right on. Thanks for coming on. Again, friends, links in the show notes to all of the other episodes that we've done. and you need to check those out and go step by step through each one. They're all pretty short. They're pretty punchy and they'll give you some great insights into the stuff that Kathy handles and the things that are important to you in terms of your financials.

20:11Kathe Barrington: So appreciate you coming on again, Kathy. Thanks a lot. Thanks for having me. All right, before you pay those bonuses on this year's profit, make sure they aren't missing job costs that are about to eat away at that profit. So get a meeting on your calendar with your accounting lead and project managers. Review your third quarter numbers and every job you expect to close by December 31st. Find out what costs could still come in and which change orders remain unresolved. Then get those numbers to your tax advisor while there's still time to make decisions. This was episode nine in our construction accounting series with Kathy Barrington.

20:48Kathe Barrington: You'll find links to the previous eight episodes and Kathy's contact information in the show notes. Share this episode with the person responsible for your clothes and schedule that review this week. We'll catch you on the next episode. Thank you for listening to this episode of Construction Genius. Hope you found that 1 % of inspiration to help you in the next few days. If you like the show, please give us a five-star review on iTunes, share it with other construction leaders who you think would benefit, and always remember that the show is brought to you by Kick-Ass Meetings. I've been working with construction leaders since 2004, teaching them how to run extremely effective problem-solving meetings that gets their people collaborating, taps into their creativity.

21:34Kathe Barrington: And to get yourself a free copy of the Kick-Ass Meeting Report, go to www.ericanderton.com slash kickassmeetings. Grab yourself that free report, read it, use it in your business. You'll find it extremely useful. And thanks again for listening.