Fractional CFO for Construction Companies
Financial leadership that understands job costing, WIP, and construction cash flow.
Key Takeaways
- •Job costing accuracy determines whether you know if you're making money
- •WIP (Work in Progress) schedule is the core financial document in construction
- •Cash flow timing can be deadly—even profitable jobs can create cash crises
- •Bonding capacity is a growth constraint that requires financial management
Construction finance is unlike any other industry. Project-based accounting, percentage of completion revenue recognition, retention, bonding requirements, and extreme cash flow variability create unique challenges that require specialized CFO expertise.
A fractional CFO who understands construction can help contractors build financial systems that support growth, protect bonding capacity, and avoid the cash flow problems that kill construction companies.
Job Costing: The Foundation
In construction, everything flows from accurate job costing. Without knowing true job costs, you can't determine profitability, price future work accurately, or identify problem projects early.
Job Cost Categories
Labor
Direct labor hours × burdened rate (including benefits, taxes)
Materials
Materials purchased for or allocated to specific jobs
Subcontractors
Work performed by subs, including retention held
Equipment
Equipment costs—owned (depreciation) or rented
Other Direct Costs
Permits, insurance, travel, job-specific overhead
Cost vs. Budget Tracking
Job cost systems should track actual costs against original estimate, with variance analysis to understand why costs differ from plan.
- Budget: The original estimate used to price the job
- Cost to date: Actual costs incurred so far
- Estimated cost to complete: Forecast of remaining costs
- Estimated total cost: Cost to date + cost to complete
- Variance: Budget vs. estimated total cost
Fade Factor
Many contractors experience "fade"—jobs that look profitable early but deteriorate as they progress. Often caused by optimistic cost-to-complete estimates that don't account for problems that typically emerge late in projects. A CFO should track fade patterns and adjust projections accordingly.
Work in Progress (WIP) Schedule
The WIP schedule is the most important financial document in construction. It determines revenue recognition, identifies over/under-billed positions, and reveals true job profitability.
WIP Schedule Components
Contract value: Total contract amount including approved change orders
Estimated total cost: Cost to date + cost to complete
Estimated gross profit: Contract value - estimated total cost
% Complete: Cost to date / estimated total cost
Earned revenue: Contract value × % complete
Billings to date: Amount invoiced to customer
Over/under billing: Earned revenue vs. billings
Overbilled (Costs in Excess)
Billed more than earned based on completion %
Favorable for cash flow but represents deferred revenue—liability on balance sheet
Underbilled (Billings in Excess)
Billed less than earned based on completion %
Asset on balance sheet but represents uncollected revenue—cash flow drag
WIP Reviews
Monthly WIP reviews with project managers are essential. The CFO should challenge cost-to-complete estimates, identify jobs drifting off plan, and ensure estimates are updated based on current information—not wishful thinking.
Construction Cash Flow
Cash flow management in construction is notoriously challenging. The timing mismatch between costs incurred and cash collected can create crises even on profitable projects.
Cash Flow Challenges
- Mobilization costs: Significant costs before first billing
- Retention: 5-10% held until project completion/acceptance
- Slow payment cycles: Progress billing, approval, payment often 45-90+ days
- Front-loading pressure: Pressure to overbill early creates back-end problems
- Change order timing: Work performed before change orders approved
Retention Impact
On a $10M project with 10% retention, $1M is withheld until completion. If you're running multiple projects with 12-18 month durations, retention can represent millions in tied-up capital. Plan for it and manage carefully.
Bonding Capacity
For contractors who bid public or large private work, bonding capacity is often the constraint on growth. Understanding what drives bonding capacity is essential for strategic planning.
Factors Sureties Evaluate
Building Bonding Capacity
Bonding capacity grows with profitable performance. A CFO can help structure the business to maximize bonding: retain earnings, manage working capital, maintain clean financials, and build a track record of profitable job completion. Surety relationships are financial relationships.
Key Construction Financial Metrics
| Metric | What It Measures | Why It Matters |
|---|---|---|
| Gross Margin by Job | Project-level profitability | Identifies profitable vs. problem work |
| Backlog | Work under contract not yet completed | Future revenue visibility |
| Backlog Margin | Estimated profit in backlog | Quality of future work |
| Over/Under Billing | Net WIP position | Cash flow and balance sheet health |
| Working Capital | Liquidity | Bonding capacity driver |
| Fade History | Margin erosion over project life | Estimating accuracy indicator |
Related Resources
Construction CFO Support
Eagle Rock CFO understands construction finance. Let's discuss job costing, WIP management, and building your financial capacity for growth.
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