Published December 19, 2022 . 6 mins read

Why ‘Job Borrow’ is a Key Metric for Contractors

Given the pressures in today’s construction industry, contractors need to do all they can to avoid “being the bank” on their projects.

A recent ProNovos lunch-and-learn session on LinkedIn—“Job Borrow: How to Identify and Avoid a Serious Cash Flow Issue”—offered some tips on how to achieve that goal.

Veteran construction accountant and advisor Brian K. Muncy (CPA, CFE, CCIFP) joined ProNovos Solutions Engineer Kevin Bright during the half-hour event.

As a Senior Manager for Indianapolis-based Somerset CPAs and Advisors, Muncy specializes in providing assurance, tax and consulting services for construction and AE firms.

As Muncy noted during the presentation, job borrow is similar to overbilling but is calculated slightly differently. “It is a concept of billing ahead of your cost and profits—trying to get that contract owner to finance the project versus you financing the project,” the CPA told the audience.

Bright, who was a PM for seven years at specialty contractor Outside The Lines, noted that many project managers focus on tracking overbilling and under-billing. However, this is not the same as trying to put an actual number on how much the company is “lending” to the job. “I might be doing OK on my over- and under-billings, but that doesn’t necessarily mean I am good from a job borrow standpoint,” Bright said.

Role of timing in job borrow values

There are some subtleties to the job borrow approach—such as how timing can affect the values of this metric. “Early on in a job, it may look like your job borrow is a little out of whack because it is putting in there that entire projected profit versus just what you have earned,” Muncy explained.

Later on, when the job is anywhere from 40 to 80 percent complete and both production and costs have ramped up, contractors should zero-in more closely on that job borrow number, Muncy advised.

“You want to see what your overbillings are and what your job borrow is to make sure that you are staying in front of that cash flow curve,” the accountant said.

In response to a question from Bright, Muncy agreed that contractors with high-interest-rate lines of credit stand to better protect their profit margins by focusing on job borrow. Billing ahead also helps protect contractors from the cash-flow risks associated with slow-to-pay customers. “A lot of times you are going to incur costs and then it could be 30 or even all the way out to 90 days before you get that cost back,” Muncy said.

Any experienced PM is familiar with that challenge, Bright noted. “You intuitively know that it is hard to get to that cash-flow-positive state on the project,” he said. “This job borrow metric is a really good way to suss out all of the noise and look at what the actual numbers are.”

Benefits of good cash flow in construction

In advising Somerset construction clients, Muncy emphasizes the importance of good cash flow. By becoming proficient at billing ahead, as well as tracking, analyzing and incrementally improving job borrow across projects, contractors can reduce their overall reliance on borrowed funds—after all, they are allocating less money to finance projects themselves.

This, in turn, gives them greater access to the working capital they need to stay competitive, the accountant noted.

At 10:34 in the presentation, Bright and Muncy fired up the ProNovos analytics platform to dive into some of the leading indicators that contractors can monitor related to job borrow.

Holding frequent job huddles based on real-time project cost data is one way to stay on top of those indicators, which include billing, change orders and other activities.

Meanwhile, an analytics platform like ProNovos can help contractors drill down into the underlying data to discover root causes.

“We all know that there are certain reasons why sometimes you are going to be in an under-billed state,” Muncy said. “But are you doing everything possible to get ahead and get that cash back into your business, or are you the one financing your project?”

Project financial timeline

At about 12:28 in the lunch-and-learn, the presenters used a sample project to show what those indicators look like in the ProNovos platform. They also discussed the value of the project financial timeline in ProNovos’ project dashboard.

The timeline uses a black line to show cost incurred, a green line for cash received and then a blue line for billed to date.

“You can see early on in the job there that they are incurring costs, but the cash flow isn’t really staying in line with it,” Muncy noted. “Their billings are not in excess of their costs; they are just right at their costs. But then you can see that once you get to that February 2022 date, their billings start going in excess of their costs. By July, their cash is catching up and is in advance of job cost.”

The point is not to passively observe what happened on the job—it’s to make strategic adjustments in real time.

“If you were to focus on some of these leading activities earlier in the job, you could get that cash in the door faster,” Muncy explained. “A lot of times, contractors look at things in an Excel spreadsheet or just from a numerical standpoint. They don’t really see all of these pieces layered on top of each other. That is one of the advantages of having a graphical tool like this.”

Bright seconded that point.

“When I was a construction manager myself, this was one of the hardest concepts for me to wrap my head around. I would say, ‘Man, I’ve got great overbilling on this project. I’m doing great,’” he said. “But I was oblivious to what that cash-received position was. In reality, it could be nearly six months before I would actually see my cash start to exceed my costs.”

Keeping overbilling in perspective

At 21:17 in the presentation, Muncy offered an important caveat about overbilling—in some cases the surety or lender may actually look negatively at significant overbillings.

These parties want to make sure contractors refrain from taking overbillings from one project to fund another one or cover the likes of general and administrative expenses.

Instead, overbilling should always be supported with corresponding assets. Muncy recommended looking at overbillings along with cash or accounts receivable. Contractors should be able to show lenders or sureties that they are holding onto generated cash for the purpose of managing and completing the project.

As opposed to just reflexively maximizing KPIs like overbillings, the goal should be to understand what’s going into those metrics—a central benefit of analytics.

“It goes back to the integrity of your work in process,” Muncy said. “Oftentimes, the biggest number driving your overbillings is your estimated cost to complete. If you are not adjusting cost-to-complete on a regular basis in some of those project huddles, your overbilling number won’t have as much meaning.”