Closing out the year: two findings worth $108,000

The review that changes next year's bids

With jobs closed, the comparison that matters becomes possible: estimated versus actual, on every project, by category.

Four questions the data should answer:

1. Which job types made money and which did not? Almost every contractor has one category that feels busy and produces nothing. It only shows up in aggregate.
2. Where did the overruns concentrate? Labor hours, material, subs, or scope that was never billed. Each has a different fix.
3. Which customers were profitable? Including the ones who consumed unpaid time in meetings, changes and revisions.
4. What did overhead actually cost, and was the markup used in bidding sufficient to cover it?

That last question is where most companies find their real problem. A markup set three years ago against a smaller overhead does not cover today's insurance, software, office cost and vehicle fleet — and the gap shows up as a year of hard work that produced no profit.

A year, in numbers

A contractor at $3.1M in revenue, 27 completed projects, doing the review for the first time.

Gross margin by category:

• Kitchen and bath remodels: 11 jobs, $1.24M revenue, 26.1% gross margin
• Whole-house renovation: 4 jobs, $980,000, 21.4%
• Additions: 5 jobs, $610,000, 18.2%
• Small repairs and service work: 7 jobs, $270,000, 9.7%

Overhead for the year: $498,000, or 16.1% of revenue. Set against the blended gross margin of 21.8%, the company finished at 5.7% net — $176,700 on $3.1M of work.

The two findings that changed the following year: the small repair category consumed 19% of scheduling attention for 8.7% of revenue at the worst margin, and the additions category was being bid with a markup that had not moved since the company was half its current size.

The response was not to abandon small work — it feeds referrals — but to price it with a minimum charge and to raise the markup on additions by four points. The following year, on similar volume, net went from 5.7% to 9.2%: an additional $108,000 from two decisions that only became visible in the review.

Reading cash the way a contractor has to

Because construction bills in draws and holds retainage, the profit and loss statement and the bank account tell two different stories, and both are true. The year-end review is where they get reconciled.

Four numbers make the picture honest:

• Work in progress. Revenue earned but not yet billed, and revenue billed but not yet earned. Without this, a contractor's financials are close to fiction — and it is the schedule sureties and lenders ask for first.
• Accounts receivable by age. Not the total, the aging. Anything past sixty days needs a name and a plan attached to it, not a hope.
• Retainage held, listed by project with the release condition for each. It is money the company earned and is financing for somebody else.
• Accounts payable against that, since paying subs on time while waiting for retainage is what actually consumes a contractor's cash.

Put together, these say whether a profitable year produced any money — and if it did not, they say exactly where it went. In most cases the answer is that growth consumed it: a company that grows 30% finances that growth out of its own cash, which is why fast-growing contractors so often feel poor in a good year.

Deciding on equipment with something other than instinct

Year end is when equipment decisions get made, usually for tax reasons and usually too quickly. Three questions make the decision better than the tax argument alone:

1. How many days was the rented equivalent actually used this year? Pull the rental invoices. Most owners overestimate by a wide margin.
2. What does ownership cost per year, including insurance, maintenance, storage and the interest on the money?
3. Does owning change what work you can take? This is the only argument that beats renting decisively — equipment that opens a job type is a capability, not a cost.

Buying a machine to reduce a tax bill is how contractors end up with equipment that sits and a payment that does not. Buying one because the rental invoices show sixty days of use and it unlocks a category is a different decision entirely.

The decisions that expire on December 31

Several choices are only available before year end, and they are worth reviewing with an accountant who knows construction rather than decided alone in December:

• Equipment purchases and how they are treated for depreciation.
• Timing of income and expenses, which depends heavily on whether the company reports on cash or accrual basis — a distinction with major consequences for contractors, and one that has rules about who may use which.
• Retirement plan contributions, for the owner and as a benefit that helps retain crew.
• Bonus decisions, which affect both the tax position and whether your best people are still there in March.
• Bad debt, formally written off rather than carried indefinitely.

Tax rules change and vary by structure and state; this is the one part of the year-end that genuinely requires a professional. The mistake is not choosing wrong — it is having the conversation in April, when nothing can be changed.

The conversation that keeps the crew

Winter is when construction crews change companies, and it is not usually about money. It is about not knowing what January looks like.

Four things worth doing before the holidays:

• Tell everyone what the winter schedule is, honestly, including if it is thin. People plan around certainty and leave because of ambiguity.
• Have the individual conversation — what went well, what changes next year, what the path is.
• Confirm raises and bonuses in December, not in February. The decision is made either way; only the timing of the goodwill is in question.
• Book the winter work now. Interior projects, punch lists, shop work and maintenance are what keep a crew employed through the slow weeks.

Filling January before December ends

The quietest month of the construction year is usually January, and it is quiet because of what was not done in November.

What fills it: following up every outstanding estimate from the past six months rather than assuming a silent one is a no; calling past clients with a specific winter offer; scheduling the interior work that has been waiting for a slow week; and pushing the design and permit stage of spring projects into the winter so the crew starts in March instead of May.

A pipeline review in mid-November — every open estimate, every likely spring project, every past client due for something — is a two-hour exercise that decides whether the first quarter is spent working or waiting.

Five mistakes at year end

• Judging the year by the bank balance. It measures timing, not performance.
• Leaving change orders unbilled. They become uncollectible and distort every job's true margin.
• Costing jobs before all supplier invoices arrive. Every project looks profitable that way.
• Talking to the accountant in April. By then every decision that mattered has already been made by default.
• Letting the crew guess about January. Ambiguity, not pay, is what moves good people in winter.

The numbers to track

• Gross margin by job type, which is where the real decisions come from.
• Overhead as a percentage of revenue, checked against the markup used in estimating.
• Estimated versus actual by cost category, project by project.
• Unbilled change orders at year end — the target is zero.
• Days from substantial completion to final payment, averaged.
• Open estimates carried into January, and their total value.

Closing out the year well is not paperwork. It is the one moment when a contractor can see which work actually paid, whether the markup still covers the company that exists today, and whether January is going to be busy — and every one of those answers is still changeable in November and permanent by February.

Frequently asked questions

Why is the bank balance a bad way to judge the year?

Because in construction it reflects timing rather than performance. The balance on December 31 depends on which draws landed that month, which invoices are still outstanding and how much retainage is being held — none of which say anything about whether the work was profitable. A contractor can have their best year on paper and their worst cash month in the same December, and the owner who reads the balance instead of the numbers draws exactly the wrong conclusion. The honest picture needs four things: a work-in-progress schedule showing revenue earned but not billed and billed but not earned; accounts receivable by age rather than in total; retainage held, listed by project with the release condition for each; and accounts payable against it, since paying subs on time while waiting on retainage is what actually consumes a contractor's cash.

What does the year-end job review actually reveal?

Which work made money, which did not, and whether the markup still covers the company. In a $3.1M contractor reviewing 27 completed projects for the first time, gross margin ran 26.1% on kitchen and bath remodels, 21.4% on whole-house renovation, 18.2% on additions and 9.7% on small repairs and service. With overhead at $498,000, or 16.1% of revenue, against a blended gross margin of 21.8%, the company finished at 5.7% net. Two findings changed the following year: small repairs consumed 19% of scheduling attention for 8.7% of revenue at the worst margin, and additions were being bid with a markup that had not moved since the company was half its current size. Pricing small work with a minimum charge and raising the additions markup by four points took net from 5.7% to 9.2% — about $108,000 on similar volume.

What has to happen before a job can be costed?

The job has to be genuinely closed, which means six things per project: all change orders written, signed and billed, since unbilled change orders are the most common form of money left behind and get harder to collect every week; final invoices issued, including retainage requests where the work is complete; all subcontractor and supplier invoices received, because a job costed while bills are still arriving looks more profitable than it was; lien waivers exchanged in both directions following local rules and deadlines; the punch list complete and signed off with warranty start dates recorded; and final job cost compared to estimate, which is the entire point. A project that stays almost done for four months is not a scheduling problem but an accounting one — it holds cash, distorts the numbers and ties a crew to work that is no longer producing revenue.

Which decisions can only be made before December 31?

Several, and they are worth reviewing with an accountant who knows construction rather than deciding alone in December. Equipment purchases and how they are treated for depreciation. The timing of income and expenses, which depends heavily on whether the company reports on a cash or accrual basis — a distinction with major consequences for contractors and with rules about who may use which. Retirement plan contributions, both for the owner and as a benefit that helps retain crew. Bonus decisions, which affect the tax position and whether your best people are still there in March. And bad debt, formally written off rather than carried indefinitely. Tax rules change and vary by structure and state, so this is the part that genuinely requires a professional. The mistake is not choosing wrong — it is having the conversation in April, when nothing can be changed.

How do you keep a construction crew through the winter?

By removing ambiguity, because winter is when crews change companies and it is usually not about money — it is about not knowing what January looks like. Four things are worth doing before the holidays: tell everyone what the winter schedule is, honestly, including if it is thin, since people plan around certainty and leave because of uncertainty; have the individual conversation about what went well, what changes and what the path is; confirm raises and bonuses in December rather than February, because the decision gets made either way and only the timing of the goodwill is in question; and book the winter work now, since interior projects, punch lists, shop work and maintenance are what keep a crew employed through slow weeks. Filling January is decided in November, by following up every open estimate and pushing design and permit stages of spring projects into the winter.