flexiblefullpage - default
Currently Reading

Better Accounting for Small-Volume Builders

billboard - default

Better Accounting for Small-Volume Builders

Mistakes in design, material selection or trade contractor contracts can turn sure profits into unexpected losses, and too often for too many builders the culprit is a lack of timely, accurate financial data to help in the decision-making process.

By Patrick L. O'Toole, Senior Editor November 30, 2002
This article first appeared in the PB December 2002 issue of Pro Builder.


Mistakes in design, material selection or trade contractor contracts can turn sure profits into unexpected losses, and too often for too many builders the culprit is a lack of timely, accurate financial data to help in the decision-making process. The reality, says longtime industry financial consultant Steve Maltzman of Redlands, Calif., is that many builders fly blind through most of the year, not knowing how well or poorly they're doing until closing, long after any opportunity to change course and improve the bottom line.

Maltzman advises many of his small-volume clients to switch to an accounting method that gives them greater accuracy in gauging their progress on a monthly basis. This is achieved by tracking the percentage of completion on each home.

But Maltzman, who manages the accounts of all Builder 20 organizations in the country, makes an important distinction between small-volume builders who build mostly on spec and those who pre-sell homes. For those who build on spec, tallying income at the very end of the process makes sense.

This is called completed-contract accounting. The critical difference is that there is no contract to purchase a spec home until it is completed, whereas pre-sold homes typically require upfront contracts with long intervals until closing.

"I encourage guys who are primarily pre-sales, small-volume builders to be booking things on percentage of completion," Maltzman says. "What it does, number one, is force the builder to relook at his or her estimate on a monthly basis. Number two, it allows a builder to measure production and productivity because every month you are clicking up the cost you have incurred during the month. You're not burying your costs on a balance sheet. You’re seeing it every month on your income statement."

Percentage-of-completion accounting requires more discipline from a builder than cash, accrual or completed-contract accounting. First, builders must develop a system for accurately forecasting their costs on each job because that forms the benchmark for progress as the job proceeds. Second, it requires additional monthly bookkeeping.


Cash Accounting
Completed Contract
Percentage of completion

Four Methods, Four Results
According to Maltzman, if a small-volume builder pre-sells a home for $500,000 and estimates his total cost for the job to be $400,000, that builder’s books will look very different under each of the four principal accounting methods (see table).

In the first 30 days, the builder pays $10,000 for permits, fees and other costs. He receives an invoice for another $10,000 from the excavator. And finally the builder sends out the first progress billing in the amount of $60,000.

If the builder uses the cash method, he would show a $10,000 loss for the first 30 days. Under accrual accounting, he would show a $40,000 gain. Under the completed-contract method, $0 would be shown under revenue, costs and gross profit. But under the percentage-of-completion method, the builder would show a $5,000 gain, a more accurate picture of where the job was at the end of the month.

The advantages of the percentage-of-completion method go away for builders closing more than 25 homes per year, says Mike Benshoof, an associate at Maltzman’s firm.

"It's all about having the data, and if you're a large enough builder, you don't need the data," Benshoof says. "If you close houses every 30 days, you don't need to do percentage-of-completion."

leaderboard2 - default


Related Stories

Hamlet Homes' Mike Brodsky on Finding Successors and Letting Go

A transition that involved a national executive search, an employee buyout, and Builder 20 group mentorship to save the deal

Time-Machine Lessons

We ask custom builders: If you could redo your first house or revisit the first years of running your business, what would you do differently?

Back Story: Green Gables Opens Up Every Aspect of its Design/Build Process to Clients

"You never want to get to the next phase and realize somebody's not happy."


boombox1 -
native1 - default
halfpage2 -

More in Category

Delaware-based Schell Brothers, our 2023 Builder of the Year, brings a refreshing approach to delivering homes and measuring success with an overriding mission of happiness

NAHB Chairman's Message: In a challenging business environment for home builders, and with higher housing costs for families, the National Association of Home Builders is working to help home builders better meet the nation's housing needs

Sure there are challenges, but overall, Pro Builder's annual Housing Forecast Survey finds home builders are optimistic about the coming year

native2 - default
halfpage1 -

Create an account

By creating an account, you agree to Pro Builder's terms of service and privacy policy.

Daily Feed Newsletter

Get Pro Builder in your inbox

Each day, Pro Builder's editors assemble the latest breaking industry news, hottest trends, and most relevant research, delivered to your inbox.

Save the stories you care about

Lorem ipsum dolor sit amet lorem ipsum dolor sit amet lorem ipsum dolor sit amet.

The bookmark icon allows you to save any story to your account to read it later
Tap it once to save, and tap it again to unsave

It looks like you’re using an ad-blocker!

Pro Builder is an advertisting supported site and we noticed you have ad-blocking enabled in your browser. There are two ways you can keep reading:

Disable your ad-blocker
Disable now
Subscribe to Pro Builder
Already a member? Sign in
Become a Member

Subscribe to Pro Builder for unlimited access

Lorem ipsum dolor sit amet, consectetur adipisicing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua.