Among the most troubling conclusions to a construction project is profit fade – when the job’s margin dims from view as work progresses (or finishes). Doeren Mayhew’s construction accounting professionals offer five key culprits in the profit fade dilemma, including project scoping, job costing and more:
1. Unusual Project Type or Scope
The rocky economy may force you to turn to unusual jobs or those that involve work beyond your typical scope. Projects like these often trigger profit fade as unexpected costs and delays arise. So in these situations, be extra conservative in your estimates. Perhaps even do some networking with other contractors, architects, or developers familiar with the work to get a heads-up about what could go wrong.
One could say that profitability begins with the estimate; therefore, invalid assumptions at this stage can doom the job’s bottom line. Compare your estimates on jobs that lost money with those you used on profitable projects. Look at elements such as labor costs, direct costs and indirect costs. Can you see where you went wrong (and right)? Are your estimates relying on outdated concepts or data?
All too often, project managers lose sight of the contract once work is underway. This also can lead to profit fade. Try holding pre-project meetings to discuss contractual provisions for scope-of-work and change orders as well as to remind your managers of your estimates. As the job goes on, check in with them (or ask them to submit reports) about how actual costs are comparing with bid cost amounts.
Sometimes profits aren’t lost on the job site, but in the office. Bad information can lead to poor project management because decisions are being made with incorrect data. Ask your construction accounting professionals to perform a fade analysis for all active jobs to see not only how profit fade is affecting your bottom line, but also where it might be originating.
Obviously, profit will tend to fade when someone is stealing from you. So if profit fade has been an issue, and none of the other usual suspects seem to apply, it may be time to check into whether foul play is involved. Your construction CPA may be able to help you determine if any fraud has taken place.
For assistance analyzing and managing profit fade, contact Doeren Mayhew’s dedicated construction accounting team in Michigan, Houston or Ft. Lauderdale.
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