If a contractor has established some form of bond capacity with its construction business, the bonding agent may have suggested the contractor consider working with a construction-oriented CPA.

“My CPA has saved me thousands on my taxes every year, why would I consider working with someone else?” You might ask.

A contractor's current CPA may be helping to avoid paying Uncle Sam but, believe it or not, saving money on taxes and building bonding capacity aren’t always in sync.

Below are some common questions from contractors surrounding their finances and building bonding capacity.

Q: Why do I need to use a construction-oriented CPA?

A: As an organization grows, its need for additional services will inevitably increase. A construction-oriented CPA is best suited to analyze, discuss and address these needs. Several “hot topics” in the construction industry include:

• the various tax methods and strategies available to contractors;
• indirect cost allocations;
• payroll and equipment burden
• the cost-to-cost method of revenue recognition;
• tracking and analysis of key performance indicators; and
• contractor-specific software analysis and implementation support.

Q: The last bond I got was under $1 million, and all I had to do was provide a tax return/Quickbooks financials. Can’t I just provide tax returns for bonding?

A: There are options for bonding support in the $1 million range with quality internal financial reports; however, as companies grow the need for generally accepted accounting principles (GAAP) in the United States, financial reporting becomes imperative to provide creditors the relevant information they need to grow with them. There can be vast differences between tax basis and GAAP basis reporting. It is important to prepare for where the company wants to go, not where it is currently.

Q: My internal accountant is anxious about our growth and need for additional services; are they still the right fit?

A: A construction-oriented CPA will assist and teach the company and its team to view and analyze financial reports through an objective lens. A willingness to learn and a positive attitude is the recipe for success when facing change. A construction-oriented CPA has the knowledge and experience to walk through proper job costing, the conversion to GAAP basis revenue recognition, evaluating and comparing the current estimating process with the true cost of construction (direct and indirect) and more.

Q: What’s the main difference between my accountant and you all?

A: Often, a small business CPA/tax accountant will give companies advice to minimize their tax burdens, which can involve actions such as purchasing equipment and taking money out of the company. What that does, however, is limit the bonding program as bonding companies base their approvals off of company profitability and liquidity within the company.

Q: My current CPA can prepare a GAAP basis report; is that good enough?

A: It depends, will the statement have the proper disclosures and footnotes that are standard for the construction industry? Is the company interested in getting by with the bare minimum needed to secure the bond, or is it interested in value-added services and building for the future? These are questions that should be discussed with an agent and CPA.

Q: What are some accounting pitfalls to watch out for as I want to grow my bond capacity?

A: Two key ratios come to mind: net working capital and debt to equity. Cash becomes lean when an organization is in growth mode. It is critical that cashflow be monitored and forecasted. One common blunder is acquiring property and equipment with cash, as opposed to traditional financing. This could have a significant impact on net working capital by taking a current asset (cash) and turning it into a long-term asset (property and equipment). Maintaining sufficient equity in the organization is critical as well: Retaining earnings in the organization and being selective and diligent with taking distributions will boost your equity position and overall financial health.

Other pitfalls include knowing the true cost of construction (direct and indirect) and aligning true costs with way projects ad bid/estimated, proper revenue recognition, accounting for retainage and proper cutoff of expenses, to name a few.

Q: How much is this going to cost?

A: Transitioning to an audit, review or compilation comes with a cost; more importantly, it should come with value. Selecting a trusted advisor that knows and understands the industry is the first step in realizing and understanding that value. Another factor to consider and discuss with an agent is the potential impact that the level of engagement (audit, review or compilation) and quality of the financial report will have on the bond rate. Contractors may be surprised to find that a quality financial report can “pay for itself,” depending on the level of bonded projects.