PCCA Journal|1
st
Quarter 2013
14
Business Planner and Strategist
Financial road maps and economic modeling include setting
priorities to provide guidance to operational execution. The
CFO must be forward-thinking, particularly regarding cash
flow management. Without effective cash flow management,
the contracting firm will not survive. The CFO must master
the incremental economics of the business. In a cost-based
pricing industry, the CFO holds the key to success or failure
since the margin for error is only plus or minus 2 percent on
average in construction. Pricing models and participating in
the selection of customers, services, and delivery methods
represent key strategy choices for contractors. Selection of
the wrong project or customer results in the “bad jobs” all
contractors experience, costing horrendous losses for this
industry. Your CFO is the gatekeeper to prevent bad jobs from
happening in your firm.
Input from the conservative voice and risk manager in the
financial area adds greater depth to the decision making that
all successful contractors value and utilize. Because there are
so many unknowns in project execution and numerous vari-
ables in delivery of construction projects, combined with the
thin margin of profit, the selection of owners and the “right
jobs” are imperative for success. The market bias toward
selection of the low bidder and the significant number of
competitors willing to compete on price significantly increase
the risk. As a steward of the financial model, your CFO has
to know when to draw the line and maintain margins of
safety for profitability preservation. The margin of safety and
the accurate timely financial control from the accounting
processes provided during the life of a contract are assets to
any project team. Your CFO is the vital agent responsible for
development of financial modeling and for subsequent moni-
toring and control of the project execution processes.
Scorekeeper
The CFO has ultimate responsibility for timely, accurate
financial reporting for both internal and external users, and
the best CFOs master this responsibility. The construction
industry has specific reporting methodologies and practices,
which are unlike most other industries. Construction con-
tracts serve as profit centers where revenues are recognizable
on estimates of contract profitability. In most cases, profit-
ability from these estimates flows through the income state-
ment each month. Construction accounting (percentage of
completion on uncompleted projects) matches the economics
of the earnings with the costs associated with those earnings
on a monthly basis, and changes in job profitability affect
the income statement on a monthly basis. Earnings and costs
are distorted when scope of work changes occur and change
orders are not approved. Costs continue for the differences in
scope of work without associated contract earnings.
While the accounting for construction contractors makes
sense under the circumstances of long-term contracts, it
creates a challenging environment for the CFO and others
involved in the accounting process, including construction
project managers. Estimates that are constantly changing
drive the information used to produce financial statements.
These changing conditions mandate that the construction
CFO be an astute evaluator of data. Project cost estimates
are prepared prior to beginning a contract and fluctuate from
that point through completion of all of the contract work as
scopes change, as anticipated production rises or falls, and as
contemplated prices from suppliers and subcontractors rise
or fall. The construction contract scope of work is subject
to change due to changing owner requirements, changed
working conditions, and unanticipated events during the
build-out. Optimistically, the large majority of scope changes
will result in positive changes to the contract amount. Other
CFO Feature
Continued from page 13
2013 PCCA Mid-Year Meeting
The Broadmoor
Colorado Springs, Colorado
July 10-13, 2013
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