The management of construction enterprise is obviously vitally concerned with its field

operations. The downfall of many otherwise well-run construction companies is the lack of
accurate, detailed, and current information concerning all aspects of the companys financial
affairs.
There are several methods in this material :

ACCOUNTING METHODS
The basic accounting procedure used by a contractor can be either the cash
method or the accrual method, cash method income is taken into account only when
cash is actuallyreceived, and expensive taken into account only when cash is actually
expended.
The cash methods is a simple and straightforward form of income recognition
and no attempt is made to match revenues, with accompanying expenses.
Then, the accounting methods principally used by :

Proffesional people
Small businesses
Nonprofit organizations
Personal records

THE BILLING METHOD

The simplest accrual accounting procedure is called straight accrual the billings
method. With the billing method, income for a given accounting period is obtained from
the total progress payment billings less the contract cost incurred for the same period

ACOOUNTING FOR LONG-TERM CONTRACTS

Two accounting procedures have been specifically developed for application to
long-term contracts. These are called the percentage of completion method and the
completed contract method.

THE PERCENTAGE OF COMPLETION METHOD

The percentage of completion method recognized job income as the work
advances. Thus the profit is distributed over the fiscal years during which the
construction is under way. This method has the advantage of recognizing income
periodically on a current basis rather than irregularly as a contracts are completed.

THE COMPLETED CONTRACT METHOD

The completed contract accounting method recognized project income only when
a contract is completed. The completed contract method can be advantageous when, on
long-term contracts, the contractor cannot accurately predict the economic results of its
future contract performance.

LONG TERM COST PLUS CONTRACTS

Under a cost plus form of construction contract, it is usual that the contractor be
reimbursed at regular intervals during the construction period for its expenditures and
also be paid a pro rata share of its fee.

FINANCIAL STATEMENTS
At interval of time, called accounting periods, it is necessary to make a
determination of the financial condition of any business. Accounts are closed at the end
of search and relevant financial statement are prepared.

THE INCOME STATEMENT

The income statement is an abstract of the nature and amounts of the companys
income and expense for a given period of time. This statement shows the profit or loss
as the differeance between the income received and the expenses paid out during the
period.

The income statement reports only the companys profit or loss experience
during the reporting period and does not show the present overall financial condition of
the firm.

THE BALANCE SHEET

A balance sheet present a summary of the assets, liabilities, and net worth of the
company at a particular time. The basic balance sheet equation may be stated as a
follows : assets = liabilities + net worth.
Assets are defined as anything of value , tangible or intangible. Liabilities involve
obligations to pay assets or to render services to other parties. Net worth is obtained as
the excess of assets over liabilities and represents the contractor s equity in the
bussines.

FINANCIAL RATIOS
Ratios of various kinds are frequently employed as quantitative guides for the
assessments of a company as financial and earning position. Many different ratios can
be used to provide company management with guidance concerning the financial
condition of the firm and areas that need attention. Four type of ratios are in wide
usage :
- Liquidity Ratios
Activity Ratios

- Profitability Ratios
- Leverage Ratios

SIGNIFICANCE OF RATIOS
The ratio of quick assets to current liabilities (quick ratio) shows the number of
dollars immediately available to cover currant debt. When this ratio is 1.0 tonlarger, the
business is said to be liquid.
Fixed assets to net worth can vary greatly from one construction type to another,
being much higher for engineering than for bulding construction.

EQUIPMENT ACQUISITION
Ownership is not always the most efficient way to satisfy equipment needs. Both
rental and leasing are important methods of equipment acquisition in the construction
industry.

EQUIPMENT PURCHASE
Purchase is the most common method of equipment acquisition. Equipment, like
other business property, is a source of depreciation expense to the contractor who owns
it.

STRAIGHT LINE DEPRECIATION

The straightline methods is the simplest depreciation procedure. Straight line
depreciation is widely applies by contractors to their equipment for internal puprpose
such as estimasing equipmentscosts and equipment costs control on going projects.

ACCELERATED DEPRECIATION
Acceleration depreciation gives a farter write-off asset cost during the first year of
its life than in the later years. Accelerated methods provide for faster recovery of
equipment value.

ACCELERATED COSTS RECOVERY SYSTEM

The economic Recovery Tax Act of 1981 estabilshed a detailed depreciation
system for business property, called the Accelerated Cost Recovery System (ACRS).
This method is required for business income tax report.

ACRS DEDUCTON PROCEDURE

There are numerous other rules and regulations associated with ACCRS. The
contractor should seek advice on matters pertaining to real property, dispositions of
property, partial expensing, and other depreciation tax matters.

EQUIPMENT MANAGEMENT
Equipment makes money for the contractor, but it must be carefully managed to
produce the expected income.

PROCUREMENT
The principal procerument functions are discussed in this format :
-

Purchasing
Expediting and Receiving
Inspections
Shipping
Subcontracts

CAHS DISCOUNT
Discount are frequently offered to the contractor by material dealers and others
as an inducement for early payment of bills. The status of cash discount is a matter of
sulficient import to be clearly spelled out in cost plus contracts.

PERIODIC PAYMENTS
Payments to the contractor at monthly intervals is the more contract proviso. The
pay request may be prepared by the contractor, rthearchitect-engineer, or the owner.
Each periodic pay request is based on the work, accomplished since the last payment
was made :
-

PROJECT COST BREAKDOWNS

PAYMENT REQUESTS FOR LUMP SUMP CONTRACTS

PAYMENT REQUESTS FOR UNIT PRICE CONTRACTS

PAYMENT REQUESTS FOR COST PLUS CONTRACS

FINAL PAYMENT

Construction contracs typically require that the general contractors request for
final payment be accompanied by a number of different documents.

PAYMENT TO SUBCONTRACTORS
Payment is frequently made to a subcontractor without specification by the
general contractor as to how the payment shall be applied by the recipient

DIRECT PAYMENT
The concept of direct payment to subcontractors has been stoutly resisted by
general contractors on the basis that it would be detrimental to their overall control of the
project.

PAYMENTS TO MATERIAL SUPPLIER

Payments by the contractor to its material supplier are made in accordance with
the terms of the applicable purchase order or usual commercial terms.

CASH FLOW
Cash flow is one of the major causes of failure for small construction firms. Cash
flow refers to a contractors income and outgo of cash.

CASH FORECAST
A cash forecast is a schedule that summarizes the estimated cash recipts,
estimated disbursements, and available cash balances for some period into the future.

THE MECHANICS LIEN

A mechanic lien is a right created by law to secure payment for work performed
and materials furnished in the improvement of land :
-

FILLING A KLIEN CLAIM

FORECLOSURE OF LIEN
WAIVER OF LIEN

ASSIGNMENTS
Assignments means the transfer of such a right from the party to whom to the
right belongs by contract to a third party.

COMPUTER USAGE
The function listed below are areas of computer usage that are representative of
current practice in the construction industry :
-

Financial Accounting
Estimating
Equipment Accounting
Payroll
Project Management
Purchasing
Word Processing

COMPUTER ACQUISITION
The contractor has some options when the decision to computerize has been
made. A constractions company can utilize a service bureau, use time sharing services,
or acquire in house hardware.

MARKETING
The company plan may involve all or some of this actions :
-

Company Brochure

Vertical Advertising
Newsletter
Publicity
Public Affair