ABC basics of construction accounting webinar april 2013

TheBasicsof
ConstructionAccounting&
FinancialManagement
ABC&CFMAWebinar
April25,2013
AnthonyR.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)862‐2420–Direct
(610)862‐2470–Fax
(215)813‐8324– Mobile
E-mail:
Today ’sPresenter:
BasicsofConstructionAccountingand
FinancialManagement
Thiswebinarfocusesonbasicconstructionaccounting
conceptsandwillprovideanoverview
–fromjobcostingtofinancialreporting
–aswellasconstruction‐specificpracticesthatintroduces
contractorstoconstructionaccountingfundamentals.
Thesefundamentalsinclude:debitsandcreditsand
howtheywork,accountingforjobcost,work‐in‐
progress(WIP)schedules,percentage‐of‐completion
revenuerecognition,anddevelopingfinancial
statements.
ConstructionIndustryBasics
ACCOUNTING istheART of:

Recording& Summarizing
business&financial transactions
AND
Analyzing,Verifying&Reporting
the results.
MerriamWebster’sCollegiateDictionary
10
th
Edition
CurrentConstructionMarket
• DealingwiththerealitiesofaRecovering
ConstructionMarket:
– SoundFinancialManagementpracticeshelpweather
thestorm
UniqueIndustryCharacteristics
• Eachprojectisdifferent.
• Industryisdominatedbysmall,
local,family,orprivatelyownedfirms
<$10‐$50M.
• Revenueisdominatedbymulti‐billion$$$
international&publiclytradedcorporations.
• A/E/Cindustryisestimatedat5%ofU.S.GDP.
12
ConstructionIndustryParticipants
• Owners
• Architects/Engineers(A/Es)
• GeneralContractors(GCs)
• ConstructionManagers(CMs)
• SpecialtyTrades(Subs)
• Suppliers

KeyFinancialPartners
• ManagementAccountants
• PublicAccountants/CPAs
• Sureties
• InsuranceAgents
• Bankers
• ManagementConsultants
14
TypesofContracts–AllCompanies
• Fixed‐Price/HardBid– 43%
• Fixed‐PriceNegotiated– 19%
• Cost‐Plus‐FeewithGMP– 11%
• Unit‐Price– 10%
• Time&Materials–7%
• Cost‐Plus‐Fee–6%
• ConstructionMgmt.–3%
From CFMA’s 2011 Annual Financial Survey
© 2011 CFMA
16
TypicalConstructionCompanySetup
CEO/OWNER
AccountingPurchasing
Project
Controls
Site
Super
PM PM
Estimating/
Bidding
Field

Operations
Office
Operations
HR
Marketing
IT
Site
Super
Site
Super
Site
Super
Proj. Acct
17
BasicDebitsandCredits
andHowTheyWork
• DEBITS
– Assets
____________________________________________
– Expenses
BasicEquation
Assets‐ Liabilities=OwnersEquity
Revenue–Expenses=NetIncome
• CREDITS
– Liabilities
– Equity
– Revenue/Sales
– NetIncome
Double‐entry accounting
• Everytransactionaff ectsandisrecordedintwoormore

accounts
• Totalamountdebitedmustequalthetotalamount
credited
• Thesumofthedebitaccountbalancesintheledgermust
equalthesumofthecreditbalances
• Ifthedebitandcreditbalancesdon’tequalanerrorhas
been
made
• Increasesinassetsarerecordedonthedebitsideofthe
assetaccounts
• Whydoassetshavedebitbalances?
– Nospecificreason–simplyamatterofconv ention
• Sinceassetshavedebitbalancesthenincreasesin
liabilitiesandownersequitymust berecordedascredits
• Thisresultsintheaccountingequation,A=L+OEandthe
requirementthatdebitsmustequalcredits
Assets Liabilities Owner’sEquity(OE)
DebitsforCreditsforDebitsforCreditsfor DebitsforCreditsfor
IncreasesDecreases Decreases Increases Decreases Increases
Double‐entry accounting
T–Accounts
Cash
Debits
ContractReceipts$100,000
LoanReceipts150,000
________________________
Totalincreases$250,000
Lessdecreases(150,000)
Balance$100,000
Credits



RentPayment$20,000
PaymentofWages100,000
PaymentofTaxes30,000
________________________
Totaldecreases$150,000
14
TheFourMostCommon
AccountingMethodsforContractors
• Cash
• Accrual
• Completedcontr act
• Percentage‐of‐completion
CashMethod
• Cashbasisaccountingrecordstransactionsbased
uponthetimingofcashflowsi.e.incomewhen
depositedandexpenseswhenpaid
• Simpletomaintainbecausebillingsandaccounts
payablesarenotrecorded
• Lowadministrativecosts
• Doesn’tgivetruepresentationofprofitability
• NotaGenerallyAccepted AccountingPrincipal
(GAAP)Method
AccrualMethod
• Simple‐‐ billingspostedasrevenue; costs
postedasexpenses
• Methodusedbymostcontractorsuntil
con vertedtoPercentageofCompletion(PCM)
• Easytocon verttopercentageofcompletion

method
• Providesgoodinformationoncashflow
• ThisMethodologyisrequiredbyGenerally
AcceptedAccountingPrinciples(GAAP)
CompletedContractMethod
• Norevenueorexpense(netincome)isrecognized
untilprojectis“substantially”complete
• Revenues/expensesrecordedinbalancesheet
accounts
• Simpletomaintain
• Maybeavailableforincometaxpurposes
• Profitabilitynotaccuratelypresentedbygener al
ledger
• CanbeanacceptableGAAPmethod
PercentageofCompletion
• Theconceptunderwhichacontractorrecognizes
incomefromfixed‐pricecontr actsasthework
progresses ratherthantheamountsbilledor
collected
• ThismethodologyisrequiredbyGAAPfor
contractors
• Revenuerecognizedbasedonextentofcosts
incurred
• Work‐in‐processscheduletiesintogeneralledger
• Showsas
Underbillings/Overbillings
ProvisionforContractLosses
• Theexpectedlossonanindividualcontr actmustbe
recognizedinfullwhenitbecomesapparentthat
therewillbealoss

• Thisisregardlessofthepercentageofcompletion
TheFourMostCommon
AccountingMethods
ContractInformation:
Totalcontractamount$1,000,000
Totalestimatedcosts $800,000
Estimate dprofit $200,000
Costsincurredtodate $600,000
Billedtodate $700,000
Cashcollectedtodate$450,000
Costspaidtodate $400,000
Costtodate $600,000 =75%X$1,000,000=$750,000
TotalEst.costs$800,000
$750,000‐ $600,000=$150,000
AccountingMethods:
Cash$50,000
Accrual$100,000
Completed
‐Contract$0
Percentage–of
‐Completion$150,000
Completed
Contract
$0
Cash
$50,000
Accrual
$100,000
Percent
Complete

$150,000
Method chosen
has substantial
impact on
net income
Policies&PracticesUniquetothe
ConstructionIndustry
• Everycontracthasuniqueterms.
• Everyjobhasdifferent“everything.”
‐ Customer ‐ Location
‐ Drawings ‐ GC&Subs
‐ Project&FieldStaff
• Estimatingisanintegralpartofjob
procurement&revenuerecognition.
• Changeordersareunavoidable.
104
ImportanceofaJobCostSystem
Goals
• Understandhowaccuratejobcostingfitsintothe
wholeconstructionprocess
• Understandtheimportanceofknowingallyourcosts
• Learnwhatcomponentsmakeupjobcosts
• Learnwhatthreemajortypesofexpensesmakeup
indirectcosts
• Learnthedifferentmethodsofallocatingindirect
costsandcoveringgeneraloverheadcosts
.
.
• Notpartofthedoubleentrysystem
• Itisaby‐productofthedoubleentrysystem

• Itistheheartandsoulofthecontract orsjob
“scorecar d”
• Thejobcostsystemdoesn’tjustkeepscore
• Ifmanagedcorrectlyitcanbethepredictor
ofajobsfutureprofitability
– laterwewilldiscusshowitfeedscontractinformation
tothecontract‐in‐progress(CIP)schedule
WhatisaJobCostSystem?