Three “Acid Test” Questions to Evaluate a CPA for Your Construction Business

Three “Acid Test” Questions to Evaluate a CPA for Your Construction Business

Over the years I have developed an acid test to determine if a CPA is truly familiar with construction cost accounting. First, I would like to qualify my remarks.

I approach managing an accounting system from a completely different perspective than a CPA. We, as systems people, look at the accounting system as a necessary and critical component to successfully run a construction business. To do this, day-to-day transactions and an accurate and real picture of your job level profit and loss is critical – and that is where we focus. This is really a different point of view than what your CPA must have to prepare your financial information for tax purposes or presentation to a bank.

My “acid test” questions are not designed to determine if a CPA is qualified, or competent, or experienced. Rather, these questions will help you identify if the individual CPA has worked with construction companies enough to be an asset to your company rather than a liability.

These questions are based on two things: First, over 25 years of experience helping contractors use systems to run their business better and more profitably done on a nitty-gritty level with lots of practical experience at what works and what doesn’t – what is important and what is not. Secondly, help and input from numerous excellent CPA’s I have worked with who have generously taught me what they know and what is important to their end goals in working with a contractor.

Now for the acid test questions. Ask these questions during your interview and really listen to how the CPA responds.

Question 1: What is your experience with monthly WIP reports? (Sometimes this is referred to as “Work in Progress” or “Over/Under Billing” schedule.)

If the answer is vague or something along the lines of “Oh, don’t worry about that. We just do it once a year to help prepare your taxes” – run for the nearest exit. The WIP is one of the most important things you can do for your business. Ideally, you should do a WIP schedule of your jobs every month. If you don’t know what a WIP schedule is, you need a CPA who can teach you about this powerful element of managing a construction company. If you do understand and use WIP, then you need a CPA who recognizes how important it is to you.

Question 2: In determining the percent complete on a job, which number trumps the other in terms of the true percent complete of the job: The actual job costs compared to the original estimated budget or the actual job costs compared to how complete the job is as estimated by the field superintendent or job foreman?

Many CPA’s have never set foot on a job site. They see it only as a manipulation of numbers in an accounting ledger. But in construction, things
never
go as originally estimated – for better or for worse. When determining how complete a job is, if you have used up 80% of your estimated budget, but are only 50% complete, then the true number is 50% complete – no matter what! This is the percent complete that should be used in your WIP, in your estimates of percent complete, in your computation of how much money you will need to spend on the job to complete it, and your estimated final gross profit on the job.

Question 3: What is the difference between direct costs and indirect costs?

Again, this question quickly drills down to how information really passes through a construction company in real-life situations. Direct costs can be easily attributed to a specific job – a box of nails, a load of lumber, an hour of a carpenter. Indirect costs are blurry and hard to define, but you would only have them if you have work. They are not true overhead costs. Things like fuel for trucks, consumables such as gloves, uniforms, and environmental suits, and small tools.

Management of indirect costs can take a lot of different forms. What you need is a CPA who
understands
in their gut the difference between direct and indirect costs and can help you manage these costs – and hopefully allocate them to direct costs. This is important from estimating to accounting – the entire life-cycle of a job.

When you ask your CPA candidate this question, look for a clear and concise definition between the two types of costs and examples that would be specific to your business. If you get an academic or non-specific answer, try the next candidate.

These questions have been tested many times and have very rarely failed me. Try them out and
please let me know
how it goes.

posted by
law