9 EVALUATING CONTRACT PROFITABILITY

9.1 MEASURING PERFORMANCE

Accounting, the language of business, speaks to company owners and managers through numerous reports and, at least annually, through financial statements that include a balance sheet, income statement, and statement of cash flows, usually prepared by independent outside auditors.1 The methods and procedures used in the preparation of financial statements for construction enterprises in the United States are regulated by Generally Accepted Accounting Principles (GAAP) rules.2 However, there is some flexibility in the reporting of transaction within the accounting rules. The same event can result in a different measurement of income3 such as with contract profitability on uncompleted projects. Because all contracts do not conveniently start and finish within a construction company's fiscal year, the measurement of profits is complicated with much room for error or manipulation.

A construction company handles a lot of money that isn't actually theirs. The company gets to keep only the profit, which most agree is too small for the risk (though no one can convince construction industry employees or the general public that it's small at all). Most medium-size and larger contracting firms would be happy to keep 2 or 3 percent of sales if they could do it. The basic problem most contractors have with evaluating contract profitability is that they leave its calculation to the bookkeepers and accountants. That's not to say ...

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