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TheBasicsof

ConstructionAccounting&
FinancialManagement
ABC&CFMAWebinar
April25,2013

TodaysPresenter:
AnthonyR.Stagliano,CPA,CCIFP (Tony)
National Managing Director of A/E/C Industry
Services

CBIZ&MHM,LLC
401 Plymouth Road, Suite 200
Plymouth Meeting, PA 19462

www.mhm-pc.com/construction
(610)8622420 Direct
(610)8622470 Fax
(215)8138324 Mobile

E-mail: tstagliano@cbiz.com

BasicsofConstructionAccountingand
FinancialManagement
Thiswebinarfocusesonbasicconstructionaccounting
conceptsandwillprovideanoverview
fromjobcostingtofinancialreporting
aswellasconstructionspecificpracticesthatintroduces
contractorstoconstructionaccountingfundamentals.

Thesefundamentalsinclude:debitsandcreditsand
howtheywork,accountingforjobcost,workin
progress(WIP)schedules,percentageofcompletion
revenuerecognition,anddevelopingfinancial
statements.

ConstructionIndustryBasics

ACCOUNTING istheART of:


Recording& Summarizing

business&financial transactions
AND

Analyzing,Verifying&Reporting
the results.

MerriamWebstersCollegiateDictionary
10th Edition

CurrentConstructionMarket
DealingwiththerealitiesofaRecovering
ConstructionMarket:
SoundFinancialManagementpracticeshelpweather
thestorm

UniqueIndustryCharacteristics
Eachprojectisdifferent.
Industryisdominatedbysmall,
local,family,orprivatelyownedfirms
<$10$50M.
Revenueisdominatedbymultibillion$$$
international&publiclytradedcorporations.
A/E/Cindustryisestimatedat5%ofU.S.GDP.

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ConstructionIndustryParticipants
Owners
Architects/Engineers(A/Es)
GeneralContractors(GCs)
ConstructionManagers(CMs)
SpecialtyTrades(Subs)
Suppliers

KeyFinancialPartners
ManagementAccountants
PublicAccountants/CPAs
Sureties
InsuranceAgents
Bankers
ManagementConsultants

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TypesofContracts AllCompanies
FixedPrice/HardBid 43%
FixedPriceNegotiated 19%
CostPlusFeewithGMP 11%
UnitPrice 10%
Time&Materials 7%
CostPlusFee 6%
ConstructionMgmt. 3%
From CFMAs 2011 Annual Financial Survey
2011 CFMA
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TypicalConstructionCompanySetup
CEO/OWNER
Estimating/
Bidding

Field
Operations
Project
Controls
PM
Site
Super

Site
Super

Purchasing
PM

Site
Super

Site
Super

Office
Operations
Accounting

IT
HR

Proj. Acct
Marketing

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BasicDebitsandCredits
andHowTheyWork
DEBITS

CREDITS

Assets

Liabilities
Equity
____________________________________________
Expenses

BasicEquation
Assets Liabilities=OwnersEquity
Revenue Expenses=NetIncome

Revenue/Sales
NetIncome

Doubleentryaccounting
Everytransactionaffectsandisrecordedintwoormore
accounts
Totalamountdebitedmustequalthetotalamount
credited
Thesumofthedebitaccountbalancesintheledgermust
equalthesumofthecreditbalances
Ifthedebitandcreditbalancesdontequalanerrorhas
beenmade
Increasesinassetsarerecordedonthedebitsideofthe
assetaccounts

Doubleentryaccounting
Whydoassetshavedebitbalances?
Nospecificreason simplyamatterofconvention

Sinceassetshavedebitbalancesthenincreasesin
liabilitiesandownersequitymustberecordedascredits
Thisresultsintheaccountingequation,A=L+OEandthe
requirementthatdebitsmustequalcredits
Assets

Liabilities

DebitsforCreditsforDebitsforCreditsfor
IncreasesDecreases
Decreases Increases

OwnersEquity(OE)
DebitsforCreditsfor
Decreases Increases

T Accounts
Cash
Debits

Credits

ContractReceipts$100,000
LoanReceipts150,000

RentPayment$20,000
PaymentofWages100,000

PaymentofTaxes30,000

________________________
Totaldecreases$150,000

________________________
Totalincreases$250,000
Lessdecreases(150,000)
Balance$100,000

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TheFourMostCommon
AccountingMethodsforContractors

Cash
Accrual
Completedcontract
Percentageofcompletion

CashMethod
Cashbasisaccountingrecordstransactionsbased
uponthetimingofcashflowsi.e.incomewhen
depositedandexpenseswhenpaid
Simpletomaintainbecausebillingsandaccounts
payablesarenotrecorded
Lowadministrativecosts
Doesntgivetruepresentationofprofitability
NotaGenerallyAcceptedAccountingPrincipal
(GAAP)Method

AccrualMethod
Simple billingspostedasrevenue; costs
postedasexpenses
Methodusedbymostcontractorsuntil
convertedtoPercentageofCompletion(PCM)
Easytoconverttopercentageofcompletion
method
Providesgoodinformationoncashflow
ThisMethodologyisrequiredbyGenerally
AcceptedAccountingPrinciples(GAAP)

CompletedContractMethod
Norevenueorexpense(netincome)isrecognized
untilprojectissubstantiallycomplete
Revenues/expensesrecordedinbalancesheet
accounts
Simpletomaintain
Maybeavailableforincometaxpurposes
Profitabilitynotaccuratelypresentedbygeneral
ledger
CanbeanacceptableGAAPmethod

PercentageofCompletion
Theconceptunderwhichacontractorrecognizes
incomefromfixedpricecontractsasthework
progressesratherthantheamountsbilledor
collected
ThismethodologyisrequiredbyGAAPfor
contractors
Revenuerecognizedbasedonextentofcosts
incurred
Workinprocessscheduletiesintogeneralledger
ShowsasUnderbillings/Overbillings

ProvisionforContractLosses
Theexpectedlossonanindividualcontractmustbe
recognizedinfullwhenitbecomesapparentthat
therewillbealoss
Thisisregardlessofthepercentageofcompletion

TheFourMostCommon
AccountingMethods
ContractInformation:

AccountingMethods:

Totalcontractamount$1,000,000
Totalestimatedcosts
$800,000
Estimatedprofit
$200,000
Costsincurredtodate $600,000
Billedtodate
$700,000
Cashcollectedtodate$450,000
Costspaidtodate
$400,000

Cash$50,000
Accrual$100,000
Completed
Contract$0
Percentageof
Completion$150,000

Costtodate $600,000 =75%X$1,000,000=$750,000


TotalEst.costs$800,000
$750,000 $600,000=$150,000

Method chosen
has substantial
impact on
net income
Cash
$50,000
Completed
Contract

$0

Accrual
$100,000

Percent
Complete
$150,000

Policies&PracticesUniquetothe
ConstructionIndustry
Everycontracthasuniqueterms.
Everyjobhasdifferenteverything.
Customer
Location
Drawings
GC&Subs
Project&FieldStaff
Estimatingisanintegralpartofjob
procurement&revenuerecognition.
Changeordersareunavoidable.
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ImportanceofaJobCostSystem
Goals
Understandhowaccuratejobcostingfitsintothe
wholeconstructionprocess
Understandtheimportanceofknowingallyourcosts
Learnwhatcomponentsmakeupjobcosts
Learnwhatthreemajortypesofexpensesmakeup
indirectcosts
Learnthedifferentmethodsofallocatingindirect
costsandcoveringgeneraloverheadcosts

.
.

WhatisaJobCostSystem?
Notpartofthedoubleentrysystem
Itisabyproductofthedoubleentrysystem
Itistheheartandsoulofthecontractorsjob
scorecard
Thejobcostsystemdoesntjustkeepscore
Ifmanagedcorrectlyitcanbethepredictor
ofajobsfutureprofitability
laterwewilldiscusshowitfeedscontractinformation
tothecontractinprogress(CIP)schedule

TheComponentsofJobCosts!
DirectversusIndirectcosts:
DifferencebetweenDirectandIndirect
Examplesofdirectcosts

Thethreemajormostcommonindirectcost pools
chargedtojobs
indirectjobcost/overhead
equipment
laborburden

ComponentsofJobCost
General Ledger
Detail Accounts
Labor
Materials
Subcontractors
Equipment
Indirect Costs

WIP Schedule

Job #2
Cost
by Phase

Job #1
Cost
by Phase
Job #4
Cost
by Phase

Need to drill
down to
lowest
level
Need
to drill
of detail

down to
lowest level of
detail
Job #3
Cost
by Phase

Job #5
Cost
by Phase

TheJobCostSystem
WhatIsIt?
WhoUsesIt?
WhyIsItImportantforContractors?

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Equipment
Management

Inventory

Purchases
Accounts
Payable
Subcontracts

Payroll

Job
Cost

Billing

General
Ledger

JobCostSystemObjectives
ForManagementAccountants
Provideusefulinformationto
decisionmakers

ForProjectManagement
Ariskmanagementtool

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Direct JobCosts
Material
Labor
Subcontractors
Equipment(rentals&installed)
Other
Bondpremiums,Permits,etc.

54

DirectCosts
DirectCostsIncludeAllCostsWhichCanBe
DirectlyIdentifiedwithanIndividualJob.
DirectJobCostsAllowYoutoMeasureYour
ActualPerformance AgainstYourEstimate.

Indirect JobCosts
Indirectlabor
Contractsupervision
Tools&consumables
Insurances
Ownedequipmentcosts
Other

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IndirectCosts
IndirectCostsAreThoseCostsWhichCannotBe
DirectlyIdentifiedWithaSpecificJob,ButWhich
PrimarilyRelatetotheCompletionofContracts.

ConstructionJobCostsExclude
General&AdministrativeExpense
SellingExpense
Boats,airplanes,vacationhomes,
snowmobiles,ATVs,RaceCars,etc.
Precontractcostsnormallyexcluded

56

General&AdministrativeCosts
General&Administrative(G&A)CostsAreNot
DirectorIndirectCosts.TheseCostsShouldInclude
theCostsofRunningtheOffice,Accounting,Human
Resources,InformationTechnologyandMarketing
theBusiness.

Allocating IndirectJobCosts
CostPools
AllocationMethods

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IndirectJobCost Pool Jobsite


Overhead
Normal jobsite overhead, also referred to as general
conditions items, includes costs such as:
Projectmanagers
Superintendents
Secretarialandclerical
workers
Timekeepers
Officetrailers
Officeequipment

Officesupplies
Temporaryelectricity
Temporarywater
Temporarysewer
Telephonecosts
Sanitaryfacilities
Trucksandautomobiles

CostofEquipment Pool

Depreciation
Interest
Repairs&Maintenance
Transportation
Licenses
Fuel,Oil,&Supplies
Insurance

HowDoYouAllocateEquipmentCosts
toJobs?

Hourly?Daily?Weekly?
CustomerBillingRate?
InternalCostrate?
ThirdpartyRateBook?
IdleRate?
OperatingRate?

HomeOfficeOverhead(SGA)
Normal home office overhead includes costs such as:
Advertising
Depreciation(officeequipment
&furniture)
Donations
Duesandsubscriptions
Insurance(officeitemsand
health/life)
Interestandbankcharges
Officesupplies
Professionalfees
Rent
Salaries office

Salaries officer
Laborburden(office)
Taxes business
Telephone
Travelandentertainment
Utilities
Yardexpense
Miscellaneous
Education
Computer
Baddebts

Whyisknowingall yourcoststhemost
importantaspectofconstructionaccounting?
Ithelpsyou:

inthebiddingprocess
todetermineproblemjobsandpeople
topricechangeorders
intheclaimsprocess
toreconcilejobcostreportstothefinancialstatements
tomakebetterbusinessdecisions

UsersofJobCostReports
ProjectManagement(primary)
TopManagement(important)
Estimator(ifproactive)
ManagementAccountant(analysis)
ExternalFinancialExecs(rare)
Customers costplusauditing

48

Attheendoftodayssession,
youwillbeableto:
Calculateearnedrevenue.
Understandpercentageofcompletionrevenue

recognitionprocess

Grasptheimportanceofmonitoringjobcosts
Identifywhataconstructioncompanyexpects

fromitsfinancialmanager.

WIP/PercentageofCompletion
Components
PercentageofCompletion
CosttoCostMethod
TotalContractValue
CostsIncurredtoDate
EstimatedCosts@Completion

Whats4thcomponent?
Billings

67

ContractValueIncludes
BasicContractValue
ContractOptionsandAdditions+/
ChangeOrders+/
Claims+/
Incentive/PenaltyProvisions+/

63

ImportanceofPercentageof
CompletionRevenueRecognition
Costincurredtodate =Percentcomplete
Totalestimatedcosts
$1,000,000 =50%
$2,000,000
PercentcompletexTotalcontractAmount=EarnedRevenue
50%x$2,200,000=$1,100,000
EarnedRevenue Billedtodate=Under(Over)billed
$1,100,000 $1,000,000=$100,000underbilled
(Costandestimatedearningsinexcessofbillings)

EstimatingCoststoComplete
Howimportantisthisstep?
KeytestofProjectManagersforesight
KeyattributeofreliableJobCostManagement
System
Anart,notascience

65

EstimatedCoststoComplete
BasisofWIP#isajobcostsystem
Requiresregular,periodiccomparisonsto
budgeted/estimatedcosts
Computeddifferently@costcodelevel(yes?)
Reflectallcostsassociatedwithperformance
ofcontract?

66

OverviewofClaims
Usuallyinvolvecontractscopeand/ortiming
issues
Fivebroadcategories:
1. Delay
2. Disruption
3. ChangedConditions
4. ChangesinScope
5. Termination

70

WhatisEarnedRevenue?
Thatportionofthetotalcontractamountthata
companyisabletorecordduringaparticular
accountingperiod.

74

TheWIPSchedule

79

Costs&Est.EarningsinExcessof
Billings(analysis)
Reflectsdrainoncashflow
Overrecognizedearnings
Suggestspotentialpoorbillingdisciplines
Increasesfinancialrisk

81

Exercise&Discussion
CostsinExcess(CIE) Asset
ComputeCIE
Examplesofwhatcreates
acostsinexcessposition.
Whatsgreatestdangerofa
CIEposition?

82

CostinExcess
Scenario Period 1
ABC/CFMA Basic
Construction Co., Inc.,
began work on the
office building just
awarded.

Contract Value
Estimated Costs
Estimated Gross Profit
Gross Profit %

$20,000,000
$18,000,000
$2,000,000
10%

Cost to Date
Estimated costs to complete

$4,500,000
$13,500,000
$18,000,000

Billings to Date

$4,500,000

Calculate the following from the above data:


Revenue Earned
Billings to date
Costs in Excess

$5,000,000
$4,500,000
=
$500,000

83

Exercise&Discussion
BillingsinExcess(BIE) Liability
ComputeBIE
Discussexamplesofwhatcreatesabillings
inexcessposition.
WhatsbiggestdangerofaBIEposition?
Suggestpossiblebadbillingdisciplines

84

Billings in Excess
Scenario - Period 2
ABC/CFMA Basic
Construction Co., Inc.
began work on the job.
The lump sum contract
allowed for advances on
estimated subcontract
draw requests to begin
critical, initial phases.

Contract Value
Estimated Costs
Estimated Gross Profit
Gross Profit %

$20,000,000
$18,000,000
$2,000,000
10%

Cost to Date
Estimated costs to complete

$1,800,000
$16,200,000
$18,000,000

Billings to Date

$2,850,000

Calculate the following from the above data:


Revenue Earned
Billings incurred to date
Billings in Excess

$2,000,000
$2,850,000
=
$850,000

85

BillingsinExcessofCosts&Est.
Earnings(analysis)
Keysourceoffinancing
Managementsandbagging!
Suggestsmartbillingdisciplines
Unrecognizedvendorliabilitysubs
Decreasesrisk??(onjoblevel)

86

Componentsof
FinancialStatements
IndependentAuditorsReport
FinancialStatements
NotestoFinancialStatements
SupplementaryInformation

35

BasicFinancialStatements
BalanceSheet
Assets,Liabilities&EquityAccounts
StatementofIncome
RevenueandExpenseAccounts
StatementofRetainedEarnings
StatementofCashFlows
WorkinProcessSchedule
SupplementalSchedules

36

NotestoFinancialStatements
Additionalinformationimportantfor
fulldisclosure
or
Toemphasizesomeimportantissuesfromthe
contractorsperspective

37

SupplementaryInformation
NotrequiredbyGenerallyAccepted
AccountingPrincipals(GAAP)
Meetsneedsofvarioususers
Contentandformvarybycompany
ShouldincludeWIPSchedule

38

RETENTION
Rangefrom5%to10%
Generallydueandcollectiblebycontractor
atcompletionofcontract
Retentionheldcanbereducedatcertain
milestones

PracticalConcepts
Reviewlaborperformancedaily
actualproductionVs.budget&jobtodate
Profit isnotadirtyword
CollectingyourreceivablesisaRight nota
privilege
Computerizeasmanyaspectsofyour
businessasyoucan

ABCConstructionCompany
EarningsfromContractsYearEnded
December31,2011
CostofGrossProfit
RevenuesRevenueProfit(Loss)
Earned
Earned
(loss)
Percent
Contractscompleted
duringtheyear1,000,000800,000200,000 20%
Contractsinprogress
atyearend1,500,0001,200,0003,000,00 20%
Unallocatedindirect
costs

250,000

(250,000)

(10)

2,500,000 2,250,000

250,000

10%

WhatisaBalanceSheet?
Balancesheetisasnapshotatacertaindate.
Whatdoesthebusinessown?
Whatdoesthebusinessowe?
Whatisthebusinessworth?
Itisameasureofliquidityandleverage.
Typicallypresentedinliquidityorder.
Liquidityreferstohowquicklyassetscanbeconvertedto
cash.
Liquiditycanalsobeviewedashowcapableabusinessis
ofcoveringitsobligations

Balancesheetpresentation
Typicallypresentedinliquidityorder.
Liquidityreferstohowquicklyassetscanbe
convertedtocash.
Liquiditycanalsobeviewedashowcapablea
businessisofcoveringitsobligations

Assets
Currentassetsrefertoassetsthatareconverted
tocashwithinayear.
UnderandOverbillingsaregenerallycurrent
assets/liabilities.
Fixedassetsrefertoitemsthatarenotforresale
andhavealifeofgreaterthanoneyear.
Equipment,furnitureandvehiclesareallexamplesof
fixedassets.

Liabilities
Currentliabilitiesaregenerallyobligationsthatwillbe
paidorarepayableoverthenext12months.
Longtermliabilitiesareobligationsthatarenotdue
untilgreaterthan12monthsfromthebalancesheet
date.

Networth

Networthisthedifferencebetweenwhatisowned
(assets)andwhatisowed(liabilities).
Reflectedintheequitysectionofthebalancesheet.
Includesoriginalinvestment(stock,paidincapital)
andretainedearningsofthebusiness.

HowtoanalyzetheBalanceSheet
Becomefamiliarwiththemajorcomponentsofthe
balancesheet.
Howmuchisinvestedinfixedassets?
Isinventoryalargepartofthebusiness?
Howmuchdebtdoesthebusinesshave?

ABC/CFMA,Inc.
BalanceSheet
December31,2011
Assets
CurrentAssets
Cash
$300,000
ContractReceivables
3,400,000
CostsandEstimatedEarnings
inExcessofBillings
200,000
Inventory
300,000
PrepaidExpensesandotherCurrentAssets200,000
TotalCurrentAssets
$4,400,000
PropertyandEquipment net

700,000

OtherAssets
CashSurrenderValue
OfficersLifeInsurance 150,000
AccountsReceivable Officer 100,000
TotalOtherAssets
TotalAssets

250,000
$5,350,000

ABC/CFMA,Inc.
BalanceSheet
December31,2011

LiabilitiesandStockholdersEquity
CurrentLiabilities
NotesPayable
$200,000
CurrentPortionofLong
TermDebt 100,000
AccountsPayable 2,800,000
BillinginExcessofCosts
andEstimatedEarnings 250,000
AccruedExpensesandother
CurrentLiabilities 150,000
IncomeTaxesPayable
Current 400,000
TotalCurrentLiabilities
$3,900,000
LongTermDebt LessCurrentPortion
450,000
TotalDebt
4,350,000
StockholdersEquity
1,000,000
TotalLiabilitiesandStockholdersEquity $5,350,000

ABC/CFMA,Inc.
StatementofOperationsandRetainedEarnings
YearEndedDecember31,2011
EarnedRevenue
CostofEarnedRevenue
GrossProfit
G&AExpenses
NetIncomeBeforeTaxes
IncomeTaxes
NetIncome
RetainedEarnings Beginning
RetainedEarnings Ending

$10,000,000
8,000,000
2,000,000
1,000,000
1,000,000
400,000
600,000
400,000
$1,000,000

Liquidityanalysis
Providesinformationaboutthecash
positionofabusinessanditsabilitytocover
currentobligations.
Currentratio(currentassetslesscurrent
liabilities).Thisisthemostbasictestof
liquidity.Willthecompanyhavetheability
tocovertheircurrentobligations?

IncomeStatement
Incomestatementisawidelyusedand
misunderstoodstatement.
Whilethebalancesheetwasasnapshotpicture,the
incomestatementisadiary.Itcapturesallthe
transactionsthathappenedinacertaintimeperiod.

InConclusion
OnbehalfofABC&CFMA...
ThankYouforYour
Participation!

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