A contractor’s numbers can arrive every month and still be hard to use. The statements show up, a decision is made from them, and then a supplier invoice or a revised estimate changes the result. One common reason is that the first version of the month was incomplete: an invoice had not arrived, an estimate had not been updated, or a reconciliation was still open, and the close had no defined end. Other reasons exist, such as a coding correction or an error found in review.
This article describes a practical framework for a contractor’s monthly close and the controller’s part in it, why cutoff and cost to complete change job margin, and which reports come out. The examples are hypothetical and the amounts are illustrative only.
This article is general information about accounting work and not advice about a specific business.
What a close is
A close is the sequence that takes a month’s activity from “recorded” to “reviewed and final.” It has a start (the period ends), a defined order of work, and an end (the period is locked). Without an end, the month stays open and the numbers keep moving. Locking gives the period a controlled end. It does not make a necessary correction impossible: if something later needs to change, the change is made with documented approval and the reason is recorded.
A controller oversees that sequence: that it happens in a defined order each month, that the accounts are reconciled, that reporting is prepared the same way each period so comparisons hold, and that problems are identified rather than carried forward. Someone else may enter the transactions. The controller’s question is how the numbers got produced and whether they can be relied on.
The order of a contractor’s close
The ten steps below are a practical framework, not a fixed process. The order and the division of responsibilities are adapted to the company and to the engagement: a business with one job type and a small office will run its close differently from one with many open jobs and several project managers. What does not change is that later steps depend on earlier ones, so the sequence matters.
- Set the cutoff. Which costs, billings, and receipts belong to the month. Everything after depends on this being applied the same way every month.
- Cash and credit cards. Reconcile to statements, and list anything unidentified.
- Payroll. Tie payroll to the reports and the liability accounts, and confirm the labor is coded to jobs.
- Payables and subcontractor costs, including accruals. Enter what has been received, and accrue work performed or materials received for which the invoice has not arrived.
- Billings and retainage. Reconcile pay applications and invoices, retainage receivable from customers, and retainage payable to subcontractors.
- Job costs. Reconcile job cost reports to the ledger. Costs on uncoded jobs are assigned. See Job Costing for Contractors.
- Cost to complete. Collect updated estimates from the people running the jobs.
- WIP schedule. Update contract amounts (with approved change orders), costs to date, estimated cost to complete, and billings. See The WIP Schedule for Contractors.
- Statements and job reports. Prepare them from the reconciled records.
- Check and lock. Compare the month with the prior month and explain large changes, then lock the period. A later correction, when one is needed, is approved and documented rather than made quietly.
Sequence and deadlines both matter. The sequence decides what can be finished when: payables cannot be final before the cutoff is set, and the WIP schedule cannot be final before cost to complete is in. The reporting deadlines decide when each step has to be done. They are agreed with the company and depend on who needs the reports and when, such as the owner, a lender, or a surety. How long the steps take depends on the volume of transactions, how many jobs are open, and how quickly the information arrives, which is why the deadlines are agreed for the company rather than assumed. This article does not state a standard number of days.
Why cutoff changes the answer
Cutoff is one common reason the numbers change after they have been used. Others include a revised estimate, a coding correction, and an error found in review. A hypothetical job:
- Contract amount: $600,000
- Estimated total cost: $480,000
- Billed to date: $330,000
- Costs recorded at month-end: $240,000
- Subcontractor work performed in the month but not yet invoiced: $42,000
What the example assumes. The company recognizes revenue over time using a cost-to-cost measure of progress, and the estimate of total cost is reliable. Under that measure, the percentage complete is costs to date divided by estimated total cost, and revenue earned to date is that percentage times the contract amount. The costs counted are costs that reflect work performed to date. The arithmetic would differ under another measure of progress or another method, such as completed contract, and a company’s own policy decides which applies. Compare the close with and without the accrual:
| Closed without the $42,000 | Closed with the $42,000 accrued | |
|---|---|---|
| Costs to date | $240,000 | $282,000 |
| Percent complete | 50.0% ($240,000 ÷ $480,000) | 58.75% ($282,000 ÷ $480,000) |
| Revenue earned to date | $300,000 | $352,500 |
| Gross profit to date | $60,000 | $70,500 |
| Billed to date | $330,000 | $330,000 |
| Billings over (under) earned revenue | $30,000 over | $22,500 under |
Nothing about the job changed. The close without the accrual shows a job that is billed ahead of the work. The close with it shows a job that is billed behind the work. A surety reading the schedule would see two different jobs. See What Sureties Look At in Contractor Financial Statements.
Why cost to complete is the entry that moves margin
The cost-to-complete estimate comes from the people running the job, not from the accounting records. The controller’s part is to ask for it on a regular cadence, check that it was updated, and question a schedule where it never moves.
Continue the example, with the same assumptions (a cost-to-cost measure of progress, and an estimate that is as reliable as the person running the job can make it). At the same close, the project manager revises the estimated total cost from $480,000 to $520,000.
| Original estimate | Revised estimate | |
|---|---|---|
| Estimated total cost | $480,000 | $520,000 |
| Estimated gross profit at completion | $120,000 (20.0%) | $80,000 (13.3%) |
| Percent complete (costs to date $282,000) | 58.75% | 54.23% |
| Revenue earned to date | $352,500 | $325,385 |
| Gross profit to date | $70,500 | $43,385 |
| Billed to date | $330,000 | $330,000 |
| Billings over (under) earned revenue | $22,500 under | $4,615 over |
The revised estimate lowers the expected profit by $40,000, from 20.0% to 13.3%, and the job moves from underbilled to slightly overbilled. This is the margin fade described in Construction Profit Fade, and it shows up in the close only if the estimate is revised. If the estimate stays at $480,000, the schedule reports a margin the job is no longer earning.
The job-level reports that come out
A controller’s close produces more than the income statement and balance sheet. For a contractor, a consistent monthly set usually includes:
- Job cost report by job and cost type, compared with the budget.
- WIP schedule, with estimated gross profit at bid, at the prior month, and now, so fade is visible.
- Billings over and under schedule, by job.
- Backlog, the remaining contract value on open jobs (contract amount less revenue earned to date).
- Retainage schedule, receivable and payable, by job.
- Tie-outs to the ledger, showing that the job reports and the WIP schedule agree with the balance sheet.
These are definitions, not benchmarks. This article states no target or “good” figure for any of them, because the right level depends on the company, the trade, and the surety or lender.
Who typically does what
Responsibilities vary by company and by engagement. This is one common division, to be adapted.
| Field and project managers | Office | Controller |
|---|---|---|
| Cost-to-complete estimates and change-order status | Entering and coding invoices, time, and billings | Close sequence, cutoff rules, and reconciliations |
| Job numbers and cost codes at the source | Getting receipts and bills in by the cutoff | Review of the WIP schedule and the job reports |
| Explaining jobs that are fading | Pay applications and retainage records | Questions on large month-to-month changes, then period lock |
Controller work and assurance
Controller work is oversight of how the numbers are produced and reported. It is different from an audit, review, or other assurance engagement: no assurance is provided, and these services do not include testing of internal controls. That does not mean controller work ignores controls. Accounting issues the close surfaces are identified and addressed within the agreed scope, and depending on that scope this can include improving how the close is set up, such as who approves entries, how reconciliations are reviewed, and how duties are divided, along with related advisory work on the accounting. The difference is the purpose: improving a process is not the same as providing assurance about it. Controller work is also not the forward-looking work of forecasting and financing, which is Fractional CFO work; a worked example of that forward-looking step is in Contractor Cash-Flow Forecasting. Where the accounting itself is behind, the first step is catching it up before a monthly close can run.
Where this connects
The service itself is described at Fractional Controller, within Outsourced Accounting. For the wider picture, see Construction & Contractor Accounting.
If the numbers arrive but change after they have been used, a useful first step is a conversation about the close. Start a conversation and tell us how the close runs today, when it starts and when it is considered done, what reporting deadlines the business needs to meet, which numbers have changed after they were used, and whether job costs and a WIP schedule are part of it. We can identify which records and access are needed when defining the scope.
Corey Roder, CPA is the founder of Corey Roder, CPA PLLC. He is a licensed CPA who founded a construction company and served as its COO and CFO, managing the financial and operational decisions of that business. Earlier in his career he worked as an auditor at Grant Thornton. More about the firm: Company & People.
Corey Roder, CPA PLLC does not itself perform audits, reviews, or other assurance engagements. Need an audit, review, or other assurance engagement? We can help coordinate it. Corey Roder, CPA PLLC maintains referral relationships with independent CPA firms that provide these services. The assurance engagement is separately contracted with and performed by the independent CPA firm.