This road trip was a pretty quick one to sunny and hot Tucson. The 1 1/2 hour flight was quick and easy, the morning run in the heat was not so quick and easy, but I survived. I stayed at the Loews Vantana Canyon resort, nice place.
This is the second year in a row I have spoken at the Sundt Construction annual meeting. That always makes me nervous because I have to remember the stories I told last year. This group was a bit smaller than last year but still a fairly large group, about 125 to 150. Like last year, one thing I like was the willingness of the participants to ask questions and participate. Smart and great group of people.
Sundt is an ESOP (Employee Stock Ownership Plan) type of company. This means that the employees own the company in the form of an employee retirement plan. The employees accrue stock in the business as they work in the business and are bought out when they retire. It’s a nice business approach because it creates a company of owners. Of course, it is not without challenges. Stock values can go up and down a lot and some employees struggle with the volatility. Sundt has been an ESOP for over 20 years so clearly it is working for them.
The session was a review of the training from last year and some training on their specific project based financials. I think it went well. One of the topics the CFO (Chief Financial Officer) appreciated was the discussion on over and under billings on a project. This is always a topic of interest for project based businesses. We had some great discussion surrounding this topic.
Here is over and under billings in a nutshell…if that is possible. Project accounting would have us count earned revenue based on what percent complete a project is based on cost. For example if a project is projected to cost $2 million and the current cost spent on the project is $1 million then the project is 50% complete according to your accountant. If the project has $3 million in revenue then $1.5 million would be recognized. The profit on the project would be $500,000.
To get the right revenue of $1.5 million on the books the accountant adjusts the revenue invoiced or billed to match the $1.5 million. If the project has been invoiced $2 million then the adjustment is to deduct $500,000 from the invoiced revenue to take the actual revenue to the correct $1.5 million. In this case the project would be over billed. The accountant would record a $500,000 liability called something like unearned revenue on the balance sheet to settle the over billing. Over billings are good for cash flow, assuming timely collections, because you are cash ahead on the project.
On the other hand, if the project is invoiced to $1 million, then the project is under billed by $500,000. In this case, the accountant needs to increase revenue by the $500,000 to account for this under billing. This would be an asset called something like unbilled revenue. Of course, this situation is bad for the business because you are cash negative on the project.
In the project management world, most projects are overbilled in the beginning because of customer down payments or mobilization fess and underbilled at the end of the project to cover retentions and final billings. The key is to have enough new projects in a business pipeline to cover the mature projects waiting on retentions. Project management businesses get into trouble when they can’t find those new projects to offset the underbilled projects.
On this trip I was able to visit my good high school friend Dave Heaton. He was my all state teammate on our state championship basketball team. We had dinner at his place and reminisced on the glory days. He is now a chiropractor in the area. If you’re in town Dave will hook you up on chiropractic issues. Great to see good friends and do a little finance too.