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In the construction industry, liabilities refer to the financial obligations the company owes to external entities, often as a result of past transactions or activities. These include payments to suppliers, wages to employees, loans from financial institutions, taxes to government bodies, etc. Additionally, in this industry, liabilities may also include future commitments to complete ongoing construction projects within a stipulated time frame and specific budget. Unfulfilled such obligations may lead to penalties or legal action, enhancing the liability further. Also significant are potential liabilities such as compensation for any work-related accidents or damages occurring at construction sites. Hence, managing liabilities effectively is vital for the financial health and reputation of any construction firm.

ASC 606, Revenue from Contracts with Customers, is an accounting standard that provides a comprehensive, industry-neutral revenue recognition model intended to increase financial statement comparability across companies and industries. For the construction industry, it has substantial implications as it changes how and when revenue from contracts is recognized. Under this model, construction companies recognize revenue by transferring promised goods or services to customers in an amount that reflects the consideration they expect to receive. ASC 606 can affect a construction company's financial statements, operations, and tax obligations. It demands that companies disclose more detailed revenue and contract information than before. Therefore, understanding ASC 606 is critical for construction industry stakeholders to assess a company's performance and future prospects accurately.

A guaranteed maximum price (GMP) is a financial cap used in construction contracts, representing the highest possible price a client can expect to pay for a particular project. This cap encompasses raw materials, labor, indirect costs, and a margin for the contractor’s profit. 

While offering financial predictability and safety to the client, this method can significantly impact subcontractors. To transfer a portion of the financial risk, general contractors (GCs) typically offer subcontractors fixed-price (or lump sum) subcontracts. This setup incentivizes subcontractors to adhere to budgets and timelines, as cost overruns directly affect their profit margins (unless the client was the one who requested changes). Conversely, if the project is completed under budget, subcontractors may benefit by sharing the savings with the GC. Ultimately, GMP contracts foster transparency and collaboration, promoting shared responsibility for project success between all parties involved. 

In GMP contracts where payments are tied to milestones or completion percentages, accurate pay applications—a core feature of Siteline—are crucial to getting paid sooner. Siteline also enables subcontractors to track outstanding balances and monitor their cash flow in real-time, empowering them with insights to proactively manage their financial health—which is paramount in GMP contracts. Ready to take control of your cash flow under GMP contracts? See how Siteline can help by scheduling a demo today.