What is the percentage-of-completion method?

Variance analysis in the construction industry refers to the process of investigating the difference between actual and planned costs, schedules, or resources during a construction project’s life cycle. It focuses on identifying and understanding discrepancies between what was initially proposed and the actual outcome, allowing project managers to spot inefficiencies, control costs, and adjust project goals accordingly. 

For instance, if a construction project was expected to consume $200,000 in materials but actually consumed $250,000, a variance analysis would examine why this $50,000 overspend occurred—whether due to price inflation, inaccurate estimating, or uncontrolled scope changes. It is a crucial tool for proactive project management, allowing early detection of performance issues and enabling timely corrective actions. Understanding the causes of variances also informs future project planning, improving the accuracy of estimates and success rates of subsequent projects.

For subcontractors specifically, variance analysis offers several key benefits that ultimately help to improve overall business performance. Regularly running variance analyses can help:

• Refine the bidding process by identifying areas where estimates were off, leading to more accurate future bids
• Aids in cash flow management, allowing subcontractors to better predict and manage their financial resources by anticipating potential overruns or savings
• Highlight areas for efficiency improvements, potentially increasing profitability
• Provide concrete support for change order requests when unforeseen circumstances affect project costs
• Identify potential risks in future projects and develop mitigation strategies
• Proactively communicate variance causes to general contractors (GCs) or the client, building trust and demonstrating professionalism
• Inform better resource allocation decisions, ensuring labor and materials are used most effectively across different projects

Effective variance analysis demands comprehensive financial data. Siteline streamlines this process by meticulously tracking change orders and generating precise pay applications, ensuring all A/R functions are accurately documented and seamlessly incorporated into variance calculations. This allows subcontractors to focus their energy on interpreting results and implementing corrective actions, ultimately improving project management and profitability. 

A Pay-if-Paid Clause is a contractual agreement prevalent in the construction industry. Generally, this clause can be found in subcontracts between the General Contractor(GC) and their subcontractors. According to the clause, the GC is not obliged to pay the subcontractors unless and until they themselves have received full payment from the project owner. Therefore, it effectively transfers the risk of the project owner's insolvency from the GC to their subcontractors. It serves as a protection for the GC against financial instability. This type of clause has its controversies, as some jurisdictions view it as unfair to subcontractors due to the assignment of financial risk.

Section 179 of the Internal Revenue Code is a deduction designed to help certain businesses recover part of the costs associated with the purchase of qualifying equipment, including machinery, vehicles, or computer software. Within the construction industry, this can be a vital tool, allowing construction firms to write off the full purchase price of equipment they have bought or financed during the tax year. Whether it’s for acquiring a new excavator, a truck, or upgrading software, the Section 179 incentive directly strengthens financial capabilities of the companies in the construction sector. This, in turn, encourages business growth and economic development. Claiming this deduction can significantly impact a construction company’s overall operating costs, providing potential major tax relief.