Pro Count
العربية

2 min read

Why contracting companies profit on paper and run out of cash

The income statement says you are profitable and the bank account says otherwise. Both are right — and the reason lies in the nature of contracting accounting itself.

Project cost schedules and progress claims on a contracting accountant's desk

A recurring scene in contracting companies: the financial statements show a reasonable profit while management delays payroll or stretches suppliers. There is no contradiction — contracting accounting separates profit from cash more than any other activity.

Reason one: revenue is recognised before it is collected

In contracting, revenue is recognised by the project's completion stage rather than when an invoice is raised. Complete 40% of a ten-million contract and four million is recognised as revenue — even if the claim has not been certified and nothing collected.

The income statement therefore runs months ahead of the bank account. That is correct accounting, but it creates an illusion of liquidity unless read alongside a cash-flow report.

Reason two: retentions

Part of every claim is held as retention, released only after the maintenance period ends — months or years later. That amount appears in your profit but is not available to you.

What we see most often in loosely kept books is old retentions that became due for release and were never claimed, because nobody was tracking them.

Reason three: the certification gap

Between submitting a claim, having it certified, and collecting it sits a gap you fund from your own liquidity: labour and materials are paid now, collection comes later.

Reason four: costs not allocated to projects

When direct and indirect costs are not allocated to projects on a clear basis, profitability becomes an aggregate that hides a loss-making project inside profitable ones. You discover the loss after the project ends rather than during it.

What fixes it

  • A separate profitability report per project rather than one company figure
  • A retention schedule with release dates, reviewed regularly
  • A forward cash-flow report running weeks ahead, not a month behind
  • Disciplined completion percentages reviewed periodically, not quick estimates
  • Updating expected project cost at every material change

The difference between an accountant and a CFO here

The accountant posts the claim, calculates completion and issues the statements — all indispensable. The CFO reads those numbers and says: this project is draining our liquidity, and that contract's margin does not cover the cost of financing it.

A contracting company with only the first knows what happened. One that adds the second knows what should happen next.

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