How to Read Financials Like a Construction Owner

In Brief:

• Track the WIP report to catch profit erosion before a project ends. By comparing costs incurred to date against estimated total project costs, the Work in Progress report reveals shrinking margins (like rising material costs) while there’s still time to act.
• Use the job cost report to pinpoint exactly where a project is going over budget. Breaking down costs by labor, materials, equipment, and subcontractors helps contractors spot whether an overrun is a one-off issue or a recurring pattern across jobs.
• A cash flow forecast prevents profitable projects from becoming cash crunches. Because profitability on paper doesn’t guarantee available cash, a rolling forecast gives owners time to accelerate collections, delay spending, or line up financing before a shortfall hits.
• The balance sheet shows overall financial health at a glance. Reviewing assets, liabilities, and equity together helps surface trends like declining cash reserves or working capital problems before they become urgent.
• Reviewing all four reports monthly, not just one, gives the clearest picture of business health. Each report captures a different angle (job performance, cost detail, liquidity, and overall position) so relying on just one can leave blind spots.

Construction companies generate dozens of financial reports every month. The challenge is knowing which reports deserve the most attention. With rising material costs, labor pressures, and aggressive competition, even small changes in job performance can have a meaningful impact on profitability. This leaves many construction company owners confused and unsure which reports to focus on and what the information is telling them. There are four key reports which should be part of every contractor’s monthly review cycle because together they provide comprehensive insight into overall business vitality. To help clients, prospects, and others, JLK Rosenberger has provided a summary of the key details below.

Work in Progress (WIP) Report

The WIP report is critical for successful construction operations. It shows whether projects are performing as expected before they are finished, giving management an opportunity to respond while there is still time to improve the outcome. It also compares costs incurred with estimated total project costs to calculate the percentage of completion. As project managers update estimated costs throughout the job, the report reflects how those changes impact projected profitability.

For example, let’s say a contractor wins a $1 million project and they estimate the total cost to be $800,000. That leaves an expected gross profit of $200,000. Halfway through the project, material prices increase, and the estimated total cost goes up to $900,000. Although the contract value has not changed, the expected gross profit is now only $100,000. The WIP report captures that change before the project is complete, which gives management an opportunity to respond and act, if necessary.

This type of scenario is common. A project that looked profitable at the start may look very different a few months later. In fact, more than 80% of contractors recently reported unexpected material cost increases and compressed schedules during the course of a project. That has led some contractors to review contract types to see if more flexibility can be built into the pricing model, especially with input costs fluctuating month to month.

To maximize project profitability, construction owners will want to watch several KPIs on the WIP report, including:

• Percent of Completion: Costs Incurred to Date / Estimated Total Project Costs x 100
• Costs Incurred to Date: Labor Costs + Material Costs + Other Direct Job Costs
• Estimated Cost to Finish: Estimated Total Project Costs − Costs Incurred to Date
• Overbilling and Underbilling: Revenue Recognized − Billings to Date

Job Cost Report

If the WIP report identifies a profitability issue, the job cost report may be able to explain why. A job cost report compares estimated with actual costs by code, allowing construction owners to see exactly where a project is exceeding budget. Most job cost reports divide expenses into categories, including labor, materials, equipment, subcontractors, and other direct costs. This makes it easier to identify whether an overrun is an isolated incidence or part of a larger trend.

For example, a job cost report may reveal that scope changes aren’t being documented properly or that rework is common on a particular type of project. These are some of the most common reasons projects exceed budget. But in this economic environment, even modest overruns can disrupt an already-thin profit margin.

When reviewing this report, contractors should look for patterns and variances. If the same labor cost code goes over the expected budget across multiple jobs or material costs consistently come in higher than estimated, it may be time to identify and address the root cause.

Construction owners will want to specifically review at least a few KPIs for warning signs:

• Job Cost Variance: Actual Cost − Budgeted Cost
• Cost Performance Index: Budgeted Cost / Actual Cost

Cash Flow Forecast

A construction company can be profitable on paper and still experience cash flow problems. A cash flow forecast helps owners look ahead by projecting expected cash receipts and cash disbursements over the coming weeks or months. Rather than explaining what happened last month, it helps identify potential cash shortages before they occur. That visibility is especially important to construction owners as project costs continue to fluctuate.

A rolling cash flow forecast gives management time to accelerate collections, delay discretionary spending, adjust project schedules, or arrange financing if necessary. If the forecast shows large upcoming expenditures without corresponding collections, that is a sign cash flow should be monitored more closely.

Owners can compare current cash flow with projected cash flow for better visibility:

• Net Cash Flow: Total Cash Inflows − Total Cash Outflows
• Projected Cash Flow: Beginning Cash + Projected Inflows − Projected Outflows

Balance Sheet

The balance sheet provides a snapshot of overall financial health. It includes what’s owned (assets), what’s owed (debts), and the owner’s equity at a specific point in time. It can help identify trends such as declining cash reserves or other working capital issues.

Key metrics to watch:

• Current Ratio: Current Assets / Current Liabilities
• Working Capital: Current Assets − Current Liabilities
• Debt-to-Equity Ratio: Total Liabilities / Total Equity

We’re Here to Help

Each of these reports looks at the business from a different perspective. Reviewing them on a monthly basis can help construction owners identify issues earlier and make the needed decisions. Most construction accounting software should be able to easily produce these reports. If you have questions about the information outlined above or need assistance with another tax or accounting issue, JLK Rosenberger can help. For additional information, call 949-860-9902, or click here to contact us. We look forward to speaking with you soon.