Construction Accountants CPA Hartford: William Brighenti
Certified Public Accountant, Certified QuickBooks ProAdvisor
Sage Master Builder Consultant
What Is Fade Analysis?

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Gain/Fade Analysis:  Important Tool for Contractors
by William Brighenti, Certified Public Accountant, Certified QuickBooks ProAdvisor

Accountants and managers working in construction need to be aware of a very important tool used by bonding and banking analysts, one often ignored by the contractor's controller and sometimes even by the outside auditor as an analytical procedure: fade analysis (also known as "gain/fade analysis"). In the construction literature, there is reference to this procedure; however, a detailed explanation or an illustrative example of fade analysis is rarely found.

In very general terms, fade analysis is a trend analysis of the estimated and/or actual gross profit of construction projects over reporting periods.  Typically it reports the differences from year to year in the total estimated/actual gross profit amounts in dollar amounts as well as in percentages.  This schedule allows the user to ascertain if any meaningful patterns are evident.  Material differences (10% or greater) customarily warrant further examination to ascertain their cause.  Also the more variability in gross profit per contract over time
evident in the fade analysis, the riskier the contractor is viewed by bonding and financial agents, since predicting the future profitability of such a contractor is less likely.

Decomposing fade analyses by project manager, estimator, category of construction work, etc., often accounts for the fade:
  1. An estimator too optimistic in his estimates
  2. A project manager ineffective in his performance
  3. A particular project outside the normal scope of work of the construction company
However, gross profit fades may occur for other reasons:
  1. Incorrect job posting of costs by the accounting department
  2. Fraud (e.g., "cost shifting")
In order to illustrate the preparation of a fade analysis schedule, assume a construction company had estimated and/or realized the following total gross profit on the following contracts, and that contracts C and D were completed in 2008,  while contracts A, B, and E were completed in 2008:

Total Gross Profit (Either Estimated or Actual) as of December 31,
Contract 2006
2007
2008
2009
A
$770,000
22.0%
$860,000
22.9%
$900,000
23.5%
$775,000
19.1%
B
1,000,000
20.0%
1,050,000
20.5%
1,090,000
20.6%
900,000
16%
C
500,000
25.0%
530,000
25.9%
375,000
17.1%
---
---
D
210,000
28.0%
215,000
28.1%
135,000
16.8%
--- ---
E
690,000 23.0%
710,000 22.9%
720,000 22.9%
650,000 19.1%

To prepare a fade analysis schedule, simply compute the change from year to year in total estimated or actual gross profit on each contract:

Fade Analysis
Contract
2007 Gain (Fade)
2008 Gain (Fade) 2009 Gain (Fade) Total Gain (Fade)
A
$90,000
11.7%
$40,000
4.7%
($125,000)
(13.9%)
$5,000
0.7%
B
50,000
5.0%
40,000 3.8%
(190,000)
(17.4%)
(100,000)
(10.0%)
C
30,000
6.0%
(155,000)
(29.3%)
---
--- (125,000)
(25.0%)
D
5,000
2.4%
(80,000)
(37.2%)
---
--- (75,000)
(35.7%)
E
20,000
2.9%
10,000
1.4%
(70,000)
(9.7%)
(40,000)
(5.8%)
Total
$195,000

($145,000)

($385,000)

($335,000)

It is readily apparent by examining the total fades that Contracts C and E would certainly warrant further investigation to ascertain the cause of such large deviations; however, when one examines the yearly changes, fades on all of the contracts in the year of completion become evident, suggesting a serious deficiency in the project management information system of the construction company.  Consequently, a trend analysis year by year provides much more insight into the reliability and accuracy of the job costing information provided by the contractor than a simple comparison of total actual gross profit to total estimated gross profit per contract:  patterns are often revealed, as evident in the above example, indicating a serious deficiency in the estimating and/or accounting system of the construction company.  Without undertaking the fade analysis year by year and simply comparing initially estimated gross profit to actual gross profit per contract, one might have concluded that the contractor had merely miscalulated on a couple of contracts.  For instance, a carefully planned systematic pattern of "shifting" job costs from one contract to another between periods might go undetected simply by comparing total actual costs to total estimated costs.

At this point, further fade analysis decompositions of highly variable contracts by project manager, estimator, type of construction, or other source of variability could be undertaken to target the root cause of the fading pattern.  Bear in mind that meaningful fade analyses require at least four years of operating data; and those extending over longer periods of time provide more insight into the source of the variability of the contract gross profits reported.

William Brighenti has thirty years of public accounting and construction accounting experience.   His career in public accounting began in 1979; since then, he has been employed as a certified public accountant at various public accounting firms in Connecticut.  Moreover, he has served as a controller of several construction companies, and for a number of years directed a residential development company in New Britain.  He also served on New Britain's City Plan Commission as well as its Board of Finance and Taxation.  As a principal at Accountants CPA Hartford, William Brighenti offers a myriad of services to contractors, including the following:

  • Fade Analysis
  • Job Costing
  • Work-in-Process Schedules
  • Completed Contracts Schedules
  • Equipment Acquisition and Costing
  • Contractor Chart of Accounts
  • Project Management Information Systems
  • Overhead Allocation
  • Sage Master Builder Consulting
  • Quickbooks Contractor Edition Consulting
  • Bonding Capacity Analysis
  • Workers' Compensation Analysis
  • Budgets and Forecasts
  • Training of Accounting Staff

For more information on construction accounting, fade analysis, the percentage-of-completion method of accounting, the completed-contract method of accounting, construction tax methods, construction accounting software, or any other accounting and tax service, please visit our website:  Accountants CPA Hartford: William Brighenti, Certified Public Accountant

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