How Accountants for Contractors Analyse Funding and Investment Opportunities

Contractor accountants provide a range of specialist professional accounting services. We have considerable knowledge of the complexities of financial management for firms with variable income streams, extended periods between cash inflows, and a need for robust, ongoing oversight of their costs, revenues, and profitability.

Two of the fundamental aspects of contractor accounting are the initial evaluation of tenders or bids to verify their financial viability and independent guidance to help contractors contrast financing options and make informed decisions about funding.

Here, we share some insight into how these accounting services work, why they are so relevant to contractor clients, and how the primary focus in accountancy and advisory support for a contractor may differ from that required by a company or business with a contrasting trading pattern.

The Vital Importance of Forecasting and Cash Flow Management for Contractors

We’ll start with a recap of the basic challenges that apply within the world of accountancy when consulting with a contractor, irrespective of the nature of their work, the sectors or industries they serve, and the timescales associated with the contracts they undertake.

The first is around cash flow, since there is commonly a significant gap between the start date of a contract and the date at which that contract is anticipated to end.

This especially applies to extended project durations such as those applicable in construction, demolition, commercial developments and engineering.

While contractors appreciate this issue and frequently build in staggered or tapered payments at key stages of project completion, this in itself can be complex since:

• A contractor may need to continually account for the value of work in progress (WIP) and be able to quantify and define their progression to claim a payment.
• Outgoings, including material sourcing, are almost always paid upfront, and the cost of securing extended terms to align incomes with expenditure is not always feasible.
• Contractor’s overheads, such as premises costs and staffing, must be paid throughout, and resources must be allocated continuously even where project stages that initiate a payment have not yet been reached.
• Tax obligations remain payable at the usual times, and accurate tax returns must be submitted to ensure the business maintains good tax efficiency at all stages.

Therefore, contractors require professional, reliable, and ongoing assistance with everything from preparing bids and tenders to forecasting income due dates, managing cash flows to cover overheads and outgoings, and ensuring that, on completion, every project will return a reasonable profit margin.

Effective Contractor Accountancy Services: The Value of Specialist Project Accounting

For most of the contractors we work with at James Todd & Co., certainty is the biggest priority.

If there is any doubt about the achievable margins, the anticipated conclusion of a project, the returns on capital invested, or the efficiency of the supply chains involved, there may be valid questions about whether undertaking a contract is in the business’s best interest.

That results in a key need for collaborative communications between our specialist contractor accountancy team, project managers, surveyors, administration colleagues, and other stakeholders, right from day one.

Our contractor accountants might, for instance, discuss the potential pitfalls and advantages of a contract before a tender is submitted, reviewing areas like:

• The security of the supply chain and whether pricing or contracted supplies are guaranteed or subject to hidden costs, market pressures or fluctuation.
• The costs of project initiation, in time and resources, and an assessment of any risks to ensure these can be properly mitigated or managed. Risks might include the potential for a client dispute or failing to complete a project to the agreed standards or timeframes.
• Flexibility of resources and capacity, particularly for large firms who might work on multiple contracts simultaneously, and where careful analysis is required to avoid overstretching and compromising on quality.
• Due diligence around legal or regulatory standards, and whether these can be well managed to ensure compliance, or whether there are unwieldy clauses that could mean a seemingly profitable contract has the potential to become impossible to manage.

When these elements have been resolved, the next stage is typically to move onto financing, discussing the right ways to set up cost-efficient and stable solutions that will protect and safeguard the business’s liquidity while ensuring the required resources are available at the right time.

Comparing and Contrasting Investment and Financing Products for Contractors

For the purposes of this guide, we’re referring to contractors in general terms. However, we appreciate that clients might work in multiple industries and professions, which may mean some funding options are less applicable than others.

However, for most, the two main sources of funding, assuming the contractor does not have sufficient capital or reserves to finance upfront costs, are investment and borrowing.

Both have respective pros and cons, and, in some scenarios, we might identify grants available to contractors engaged in specific types of project work.

Although grant funding can be subject to fierce competition, the time spent preparing submissions and documentation may be worthwhile, with most grants often better suited to work focused on research and development.

Investment vs Lending vs Secured Borrowing

A common mistake is to assume that bank loans and asset finance are the only options.

While they could be good solutions, smaller contractors could be asked to provide personal guarantees or might be offered unreasonably high rates from financial institutions that are less familiar with the nature of their work or who do not specialise in contractor finance.

Venture capital and angel investment can be an alternative, but contractors also need to decide whether the trade-off between financing and equity ownership is appealing and fits into their broader plans.

Finally, we can help compare alternative sources of contractor financing, either higher-cost unsecured funding or less risky secured funding—again, with the compromise that the latter involves financing being secured against an asset that acts as collateral.

Each of these funding routes could be beneficial, attainable and cost-efficient, but by working with an experienced team of contractor accounts, business owners ensure they have proper oversight of all the options and make clear judgements with the added peace of mind that these are in the interests of their businesses.

For more information about any of the aspects of contractor accountancy we’ve touched on here, you are welcome to contact the James Todd & Co. team directly or send an enquiry via our website to arrange a convenient time to talk.