The symptom
Year-end accounts show £400,000 of profit. The bank balance this morning is £11,000 against a £150,000 overdraft limit. The owner assumes the problem is them: spending, pricing, something. Usually it isn't. The accounts are describing a business that doesn't exist.
Gap one: applications booked as sales
An application for payment is a request. The client's QS certifies some of it, some of the time, on their own date. Until it's certified you haven't earned it. Most bookkeeping systems raise the application as a sales invoice the day it's sent, so revenue and profit appear months before the cash can, and disputed amounts sit in profit forever. On a £6m contractor, £80,000 to £150,000 of applied-but-uncertified work in the sales figure is normal and invisible.
Fix: revenue on certified value. Track applications separately, so the gap between applied and certified is a number you watch, not a number you don't know exists.
Gap two: retentions treated as ordinary debtors
Five percent of every certificate, held for up to eighteen months, sitting in the aged debtors list beside last month's invoice. The debtor book looks healthy. The cash position looks healthy. The money is a year away. See our guide to tracking and recovering retentions.
Fix: a retentions control account, shown separately with release dates, excluded from the short-term cash forecast until due.
Gap three: work in progress ignored until year-end
Labour on site last week, materials delivered Tuesday: all booked as cost in the month they happened, none matched to the application they'll produce next month. Monthly profit swings for reasons that have nothing to do with how the business is doing. A big delivery makes a month look terrible; the certificate for it makes the next month look wonderful.
Fix: a monthly WIP adjustment. Cost on work not yet applied for is carried as an asset until it's applied. Then month-to-month comparison means something.
Gap four: costs not matched to jobs
One profit figure for the whole company hides the job that's losing money behind the three that aren't. See job costing for construction companies.
Fix: every cost coded to a job at source; margin by job monthly on a certified basis.
What the two versions look like side by side
| Measure | Standard accounts | Certified basis |
|---|---|---|
| Turnover (year) | £6,214,880 (applications) | £6,089,400 (certified) |
| Gross margin | 20.8% | 18.9% |
| Trade debtors | £1,102,551 | £517,200 due + £88,400 applied not certified + £61,900 retentions, shown separately |
| Profit, month to month | Swings £40k either way | Steady, with WIP adjusted |
| Which jobs made money | Unknown | Five jobs, one flagged |
Nothing dishonest in the left column. It just answers a different question from the one the owner is asking.
Why your accountant hasn't fixed this
At most firms, construction is one client type among forty. The person doing your accounts has probably seen one or two construction companies and is learning CIS and reverse charge on your time. They produce statutory accounts that are technically correct and practically useless, because nobody asked them for anything else. That's a service gap, not a character flaw on anyone's part. But it's your cash funding it.
What to ask for
- Revenue recognised on certified value, with applications tracked separately.
- Retentions in their own control account with release dates.
- A monthly WIP adjustment.
- Margin by job, monthly, within ten working days of month-end.
- A 13-week cash forecast built from contract payment dates.
If the answer is that this isn't what they do, it's worth finding someone for whom it is.
Sources
Questions people ask
Isn't booking the application as a sale required by accounting standards?
No. FRS 102 recognises construction contract revenue by reference to the stage of completion, which in practice means certified value plus a measured assessment of unapplied work. Booking the application in full on the day it's raised overstates revenue.
Will changing to a certified basis reduce my reported profit?
In the first year, usually yes, because the applied-not-certified amount comes out of revenue and retentions are reclassified. After that, profit is steadier and more believable, and lenders prefer it.
Can my bank see the difference?
Lenders increasingly ask for management information on a certified basis with a retentions schedule and a cash forecast. A business that can produce them gets better terms than one that can't.
How quickly can this be fixed?
The first month's work is the heaviest: rebuilding the last twelve months on a certified basis and building the ledger. After that it's a monthly routine of a few hours.
About the author. Chris Neuman is the founder of Taxtful, accountants and advisers to UK construction companies turning over £1m to £15m. Taxtful is construction-only: every client, every template, every conversation. This article is general guidance, not advice on your circumstances; rates and rules change, so check the current position before acting.