May 2014 BASICS WebLive Session 1 Final MD JS · ¾ 6: Calculating PCM Exercises ¾ 7 ... ¾ 8,9:...

of Construction Accounting

The

g r o u p l i v e

CFMA

NOWknowledge

BasicsSponSored by:CONSTRUCTION

FINANCIAL MANAGEMENT ASSOCIATION

Helping You Build a Better Bottom Line

The Basics of Construction Accounting Presenter Bios

Jill Stone, CCIFP, is the controller of Executive Construction Inc. As Controller at ECI her day to day responsibilities include ensuring contract compliance for all jobs, upholding internal controls, internal and external audits, cash management, and reporting on monthly and quarterly financial results. She enjoys improving productivity through system enhancements and process improvements. Jill currently serves on the Board of Directors of the Chicago Chapter of the CFMA and has been heavily involved since she joined in 2007. She is extremely proud that she was named the 2013 General Member of the Year! Jill has 15 years of experience in the construction industry. Mary Davolt, CPA, CCIFP, is the CFO of Englewood Construction Company where she oversees the finance and accounting of the organization. She currently serves on the Board of Directors of the Chicago Chapter of the CFMA and has been a member since 2005. She has over 25 years working with and in the construction industry. Mary has been recognized numerous times for her professional achievements in the industry, and most recently she received the 2013 Chicago CFMA Associate member of the Year Award. She has been recognized in the Influential Women in Business by the National Association of Women in Business and has been featured in Kiplinger’s Magazine.

The Basics of Construction Accounting

WebLive Course Outline

Thursday, May 8, 2014 3‐5PM EST

Introduction Section 1 - Industry Overview Section 2 - Terminology & Authoritative Resources Section 3 - The Contract Life Cycle


Section 4 - Job Cost Reporting Section 5 - Revenue Recognition


Section 6 - Computing Earned Revenue Section 7 - Cost Reporting Analysis Section 8 - Elements of Financial Statements


Section 9 - Financial Statement Analysis Section 10 - What’s Expected of YOU Section 11 - Industry Benchmarks

Workbook References:

1: SIC/NAIC Codes & CSI Master Division Formats 2: Glossary of Terms 3,4,5: Job Cost Summary, Cost Type Identification & Allocation Method, Job Cost Chart 6: Calculating PCM Exercises 7: The WIP Schedule 8,9: FASB Accounting Standards Codification, Sample Financial Statements 10: CFMA’s 2013 Financial Survey: Executive Summary

This course qualifies for 8 CPE credits in the field of Accounting....……..………… After completing this course, you will be able to:

• Explain the core points of revenue recognition; • Discuss the importance of a job cost system; • Calculate earned revenue; • Identify what a construction company expects from its financial manager.

This is an Internet-based course at the BASIC LEVEL, no prerequisites or advanced preparation required.

© 2014 CFMA. All rights reserved.

CFMA’s WebLive Series:The Basics of Construction Accounting

Participant Guide: Session 1May 8, 2014

© 2014 CFMA. All rights reserved. 1

Session 1May 8, 2014

www.cfma.org © 2014 Construction Financial Management Association. All rights reserved.

The BASICS of Construction Accounting

Presented by Mary Davolt, CPA, CCIFP & Jill Stone, CCIFP

An Introduction to Construction Accounting & Financial Management Principles

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CopyrightThis presentation and all associated materials (including but not limited to workbooks, handouts, CD‐ROMs, etc.) are copyrighted by CFMA and may not be altered, adapted, reproduced, or redistributed in any manner without express written permission from CFMA’s Vice President of Content Management and Education and/or Chief Operations Officer. Unauthorized use of any CFMA copyrighted materials is expressly forbidden by law.

Questions regarding usage and content should be directed to:CFMA, 100 Village Blvd., Suite 200, Princeton, NJ 08540Phone: 609‐452‐8000 E‐Mail: [email protected] Web: www.cfma.org

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Special Thanks To…Gordon Marshall, Faith McDermott, Mary Davolt, Jill Stone and Tony Stagliano

We are grateful for their time, talent, and diligencein the creating and updating of this course and materials. It is because of the dedication of our volunteer members that CFMA continues to be The Source & Resource for Construction Financial Excellence.

Questions concerning content, etc. should be directed to [email protected].




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AcknowledgementCFMA would like to acknowledge…

as the official sponsor of CFMA’s“Basics of Construction Accounting” course

and all of CFMA’s WebLive Programs

Program ScheduleSession 1: Thursday, May 8, 2014 3:00-5:00 PM EST

Session 2: Thursday, May 15, 2014 3:00-5:00 PM EST



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Course Presenters

Mary Davolt, CPA, CCIFPCFO, Englewood Construction Inc.Email: [email protected]

Jill Stone, CCIFPController, Executive Construction, Inc.Email: [email protected]

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Session 1 Agenda:I. Introduction

II. Section 1 - Industry Overview

III. Section 2 - Terminology & Authoritative Resources

IV. Section 3 - The Contract Life Cycle

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IntroductionPolling Question #1:Who’s here today?

a) GCsb) Specialty Tradesc) Banking/Financiald) Insurance/Suretye) CPA firm – Tax/Auditf) Attorneyg) Business consultant

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Our ObjectiveTo provide a basic working knowledge of construction industry accounting principles, procedures and financial guidelines…

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So that as Construction Financial Professionals, we can…

Understand what’s being asked by our Key Financial Partners, and ask relevant questions of them.

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This Knowledge Will…Improve communication between:

• Owners• Company’s Financial Execs &

Management Team• Project Managers• Other Industry Partners

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At the end of all four sessions you will be able to…• Explain the core points of revenue recognition.

• Discuss the importance of a job cost system.

• Calculate earned revenue.

• Identify what a construction company expects from itsfinancial manager.

• Realize how “SIMPLE” accounting can be12




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Accounting made simple…


Polling Question #2:How’s Business?

a) Flat

b) Trending upward

c) Trending downward

d) Not enough time in the day

e) No clue14

“The Basics”

15

Section One: Industry Overview





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 is estimated at 5% of U.S. GDP.

Unique Industry Characteristics

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Owners

Architects/Engineers (A/Es)

General Contractors (GCs)

Construction Managers (CMs)

Specialty Trades (Subs)

Suppliers

Construction Industry Participants

17


Management Accountants

Public Accountants/CPAs

Sureties

Insurance Agents

Bankers

Management Consultants

Key Financial Partners

18





Contractor Classifications: SIC & NAIC

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SIC NAICS

Industrial & 1541, 1542 23332, 23331

Nonresidential

Heavy & Highway 1611, 1622, 23411 to 234991623, 1629

Specialty Trades 1711-1799 23511 to 23595

Workbook Reference-1

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SIC-NAIC Codes

CSI Divisions

Fixed Price Hard Bid – 42%

Fixed Price Negotiated – 21%

Cost Plus Fee with Guaranteed Maximum Price (GMP) – 11%

Unit Price – 9%

Time & Materials – 6%

Cost Plus Fee – 5%

Construction Mgmt. – 3%

Types of Contracts

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Source: CFMA'S 2013 ANNUAL FINANCIAL SURVEY Online Questionnaire Results




Sample Construction Company

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CEO/Owner

BusinessDevelopment

Marketing Estimating

Construction/Operations

ProjectManagement Safety Site Supers

Finance

Accounting& HR IT Admin

Policies & Practices Unique to the Construction Industry

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Every contract has unique terms.

Customers may require specific information & format for billing that impacts your system, policies and procedures.

Estimating is an integral part of job procurement & revenue recognition.

No two projects are the same. They are impacted by so many variables such as design, location, employees/subs, scope of work, weather, time of year.

The one industry where Change Orders are the “Norm”.

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Section Two: Terminology & Authoritative Resources

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“The Basics”

Terms Used Today

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WIP

AMT

GMP

AEC

• AICPA Audit & Accounting Guide – Construction Contractors www.aicpa.org

• Financial Accounting Standards Board www.fasb.org

• IRS construction infohttp://www.irs.gov/businesses/small/industries/index.html

Authoritative Resources

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Financial Management & Accounting for the Construction Industry (“The Book”)Education & Development Center atwww.cfma.org

CFMA Building Profits magazine Publications & Resources Center atwww.cfma.org

The Body of Knowledge

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Financial Accounting Standards Board (FASB)

International Accounting Standards Board (IASB)

Accounting Updates

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Cash Method

Accrual Method

Completed Contract Method

Percentage of Completion Method (PCM) - 96%– Percentage of Completion (Cost to Cost) 85%– Percentage of Completion (physical % complete) 9%– Percentage of Completion (hours of labor, labor $) 3%

Revenue Recognition

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Workbook Reference-2

31


•Glossary of Terms

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Section Three: Contract Life Cycle

“The Basics”

Contract Life Cycle

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Contract Performance

Prebid /Bid

ContractAward

ContractCompletion




• CFMA Basic Construction Co., Inc. has received an invitation to bid on a project to build a 75,000 sq. foot office building in downtown Smallville. The owner has decided to use the traditional method of construction (an architect and general contractor) and is seeking closed competitive bids for a lump sum contract.

• The architect has already submitted plans and specs to the owner who has approved them. The owner has provided to all bidders a description of the building and a copy of the plans, the location of the building site, due dates, and how to obtain access to any other information the contractor might need.

The Scenario

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35


Prebid/Bid – Risk Analysis

• Management reviews invitation, verifies owner credentials,assigns estimator

• Construction site physically inspected, risks identified• Estimator makes assumptions on how work is to be

accomplished• Self-perform/ subcontract decisions are made if appropriate• General conditions costs determined & estimate summarized• Bid submittal paperwork complete/verified (bid bond) &

submitted on timeASSESS RISK

Contract Life Cycle Activities

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Contract Award – Plan the Work

• Owner sends Notice of Intent to Award or Notice to Proceed• Bonds & insurance secured; PM assigned & team identified• Schedule of Values developed for interim progress billings; also

manpower schedule • Estimate converted to budget format on cost system (on the

accounting side, Total Estimated Costs & Contract Value can beidentified)

• Subcontract & Suppliers buyouts completed• Significant risks identified with plan to mitigate risks (i.e.,

improve profit)ASSESS RISK





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Contract Performance - Do the Work

• Site mobilized with field crews/job trailers• Site meeting schedules established with subcontractors, safety & owner

• PM monitors manpower progress: plan vs. actual; also cost commitments, cash flow, lien releases

• Set up administrative procedures such as field requests for information, change order control, submittal tracking, etc.

• On the accounting side, this stage is where billings & collections occur, accounts payable and account disbursements occur and where job progress reports are reviewed, etc.

ASSESS RISK


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Contract Completion – Moving On

• Change Orders/Claims Finalized• Punch list completed• Final lien releases• Document control/archiving• As-builts, Final submittals, Change orders• Post-mortem/lessons learned & Customer feedback • Feedback from Operations to Estimating• Retention collected• Final cost report

ASSESS RISK


End of Session 1

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Wrap‐Up / Q&A

Mary Davolt, CPA, CCIFPCFO, Englewood Construction Inc.Phone: 847-260-4742Email: [email protected]

Jill Stone, CCIFPController, Executive Construction, Inc.Phone: 708-236-3355Email: [email protected]




Which is not a key financial partner in the construction industry?

a) Sureties

b) Engineers

c) Insurance Agents

d) Public Accountants/CPAs

Review Question #1

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Which method of Revenue Recognition is the preferred method for the industry?

a) Completed Contracts

b) Percentage of Completion

c) Accrual Method

d) Cash Method

Review Question #2

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Which item is not part of a contractors prebid/bid work?

a) Physical inspection of job site

b) Buyout of subcontractors and/or suppliers

c) Verification of owners credentials/financials

d) Determination of expected general condition costs

Review Question #3

42





FOR MORE INFORMATION:Ariel Sanchirico : [email protected] : 609.945.2433

CFMA : 100 Village Blvd., Suite 200 : Princeton, NJ 0854043


To receive your CPE Certificate for this session, please complete the PROLibraries evaluation survey.

Just log into your account and click on “My Webinars” to take the survey and print your certificate.

Don’t forget to join us for Session 2 of “The BASICS of Construction Accounting”Thursday, May 15, 2014 3:00‐5:00 PM EST

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