Instructor Blog - Contractors

Q: How do you get the figure of 5.64% for the break-even gross margin?

A: To break even in 2019, Southwest Contractors must improve its gross margin by 157 basis points since its net profit margin in 2018 was a negative 1.57% or a negative 157 basis points. As the Selective Risk Measures for Southwest Contractors on Slide 15 indicate, the 2018 gross margin was 4.07%. Therefore, to reach break-even in 2019, the gross margin must improve by 157 basis points to 5.64%, or 4.07% + 1.57% = 5.64%. Any improvement in the gross margin in 2019 that exceeds 157 basis points will return the company to profitability,

Q: Where do you see Job Numbers 4004 and 4012 being completed before 3/31/2019?

A: There is no information about Job Number 4004 and 4012 in the limited information provided about the status of contracts at 03/31/2019. These two contracts could be either open or closed. However, it is certainly possible that both remained open at 03/31/2019 since they were 30.70% and 8.75% completed, respectively, at 12/31/2018.

Nonetheless, if they were completed by 03/31/2019 and their expected gross margins of 9.84% and 17.93%, respectively, at 12/31/2018 matched their actual gross margin at closing, the removal of these two jobs at gross margins above 9.06% would help explain the fall in the expected gross margin on open contracts from 9.06% at 12/31/2018 to 6.57% at 3/31/2019.

Course overview: Understanding and Analyzing Contractor Financial Statements Part II of II