As year-end approaches, many construction companies find themselves managing ongoing projects that won’t wrap up until the next fiscal year. Navigating these “rollover” projects requires careful financial planning and accurate reporting to ensure a smooth transition into the new year. At Baldwin CPAs, we understand the unique challenges of the construction industry and have some tips to help you manage projects that cross over into 2025.
1. Review Your Project Accounting Method
One of the most critical aspects of handling rollover projects is ensuring you’re using the right accounting method. For construction, this typically means either percentage-of-completion or completed-contract accounting:
- Percentage-of-Completion Method: This method records revenue and expenses in line with the progress of the project. It provides a more accurate picture of your financial position at year-end for ongoing projects but requires precise tracking of costs and completion stages.
- Completed-Contract Method: This approach defers all revenue and expenses until a project is complete. While simpler, this method can create larger fluctuations in income from year to year, especially when projects are long-term or delayed.
Tip: Talk to your CPA about which method best fits your project timeline, company size, and reporting needs.
2. Assess Project Progress and Costs to Date
Closing out the year with a clear understanding of where each project stands can help you report accurately and identify any potential budget or timeline issues early. For each rollover project:
- Evaluate Costs Incurred vs. Budgeted Costs: Reviewing costs-to-date allows you to assess the financial health of each project, ensuring that any variances are recorded and accounted for.
- Adjust Estimates if Necessary: For projects using the percentage-of-completion method, ensure that your cost estimates are updated to reflect any changes, such as material price increases or delays.
Tip: Keeping costs and projections accurate can prevent overestimating or underestimating revenue, helping you make smarter budgeting and tax planning decisions.
3. Address Revenue Recognition Requirements
Revenue recognition rules have become stricter under accounting standards like ASC 606, which impacts how and when revenue is recorded. For rollover projects, this means carefully tracking performance obligations and ensuring that revenue is recognized in line with actual project milestones or completed work.
- Identify Milestone Payments and Retainage: Ensure that any progress payments or retainage amounts align with the work performed. This keeps your revenue recognition accurate and compliant.
- Document Completed Phases: Documenting completed phases of a project helps verify that revenue is recognized appropriately, especially when projects span multiple accounting periods.
Tip: Consistently tracking and documenting your project milestones will make it easier to comply with revenue recognition requirements at year-end.
4. Plan for Taxes on Unfinished Projects
Year-end planning for tax obligations can be complex with ongoing projects. In many cases, rollover projects generate revenue or incur costs that need to be carefully allocated across fiscal years.
- Review Tax Implications for Revenue and Expenses: Depending on your accounting method, review the tax implications of any revenue and expenses associated with rollover projects. This can help minimize tax liabilities and avoid surprises.
- Consider Deferred Tax Liabilities: If revenue is recorded in one year and expenses roll over to the next, discuss with your CPA how to manage deferred tax liabilities that could arise from the timing differences.
Tip: Early planning with your CPA can help you explore opportunities for tax deferral or deductions, particularly on projects with high costs or extended timelines.
5. Communicate with Stakeholders
Maintaining transparent communication with clients, subcontractors, and stakeholders at year-end can help reduce confusion and set clear expectations for the new year.
- Update Clients on Project Status: Clients will appreciate knowing the status of projects, particularly if delays or budget adjustments have occurred.
- Confirm Subcontractor Invoices and Payments: Ensure that all outstanding invoices from subcontractors are received, approved, and paid where possible to simplify your end-of-year reporting.
Tip: Year-end is an ideal time to ensure your team and project partners are aligned, reducing the risk of delayed invoicing or unplanned costs in the new year.
Discover how Baldwin CPAs can support your business in achieving financial clarity and success. Visit our Construction Services page to learn more about our specialized offerings and how we can assist you in managing your year-end financial processes effectively.
By implementing these practices and leveraging professional guidance, your construction company can confidently manage projects that extend beyond the fiscal year, ensuring financial accuracy and strategic advantage.
