The Basics of Construction Accounting - s BASICS of Construction Accounting Session 2: Participant...

CFMA’s BASICS of Construction Accounting Session 2: Participant Guide

© 2013 CFMA. All rights reserved. 1

The Basics of Construction Accounting

1© 2013 CFMA. All rights reserved.

An Introduction to Construction Accounting & Financial Management Principles

Day 2

This 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

Copyright Notice

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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

© 2013 CFMA. All rights reserved.

Special Thanks to…Gordon Marshall, Faith McDermott, Mary Davolt, Jill Stone and Tony StaglianoWe are grateful for their time, talent, and diligencein the creating and updating of this course and materials

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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].




AcknowledgementCFMA would like to acknowledge…

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as the official sponsor of “The Basics of Construction Accounting” course

and all of CFMA’s WebLive Programs


Program ScheduleDay 1: Thursday, Nov. 14, 2013 - 3:00-5:00 PM EST

Day 2: Monday, Nov. 25, 2013 - 3:00-5:00 PM EST

Day 3: Thursday, Dec. 5, 2013 - 3:00-5:00 PM EST

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Day 4: Thursday, Dec. 12, 2013 - 3:00-5:00 PM EST


Anthony R. Stagliano, CPA, CCIFPNational Director of Construction Industry ServicesCBIZ & Mayer Hoffman McCann P.C.Phone: 610-862-2420Email: [email protected]: www.mhm-pc.com

Session Presenters


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Kevin Foley, CCIFPChief Financial OfficerE. Allen Reeves, Inc.Phone: 215-884-2255 – Ext. #123Email: [email protected]: www.eareeves.com



Section 4 – Job Cost Reporting

Section 5 – Revenue Recognition

Today’s Agenda: Day 2

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Section 5 Revenue Recognition


“The Basics”Section Four:

Job Cost Reporting


Polling Question #1:

Does Codification Topic 605-35 require that contractors produce a job cost report?

a) YES

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b) NO




Designing the Chart of Accounts for the General Ledger

Begin with the end in mind

Discuss owner’s 5-year vision

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Ask your accountant, surety & banker about common mistakes on financial statements

Design chart of accounts


Example Chart of Accounts

Number Series Classification1000 Assets

2000 Liabilities & Equity

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3000 Sales & Revenue

4000-8000 Expense (SG&A)

9000 Other Income/Expense


Subsidiary Ledgers, Including Job Cost

Cash Receipts

A/P

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Job Cost




Job Costing IMPORTANT to agree on a consistent method of Coding for your company.

The job cost reporting system is used by the Estimators Project Managers and the

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Estimators, Project Managers, and the Accounting Department

Resources


Follow the Money…From Chart of Accounts to Financial Statements

Asset and Liability & Equity Accounts –Balance Sheet

Revenue and Expense Accounts –I St t t

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Income Statement

Statement of Cash Flows

Job Schedule and WIP –Supplemental Schedules


The Job Cost SystemWhat Is It?

Who Uses It?

Why Is It Important for Contractors?

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Why Is It Important for Contractors?




Job Cost System Objectives

For Management Accountants –

Provide useful information to decision makers

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decision makers

For Project Management –A risk management tool



Do estimators actually rely on historical job cost information?

a) YES

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a) YES

b) NO


Users of Job Cost ReportsProject Management (primary)

Top Management (important)

Estimator (if proactive)

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Management Accountant (analysis)

External Financial Execs (rare)

Customers – cost-plus auditing




Factors in Cost AccumulationSize and type of contractor

Contract type

Owners

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Bid format

Accounting rules

Management Attitude - KISS principle


Critical Work Activity Measures

Identifiable phases of work

Specific work tasks or packages

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Quantities of materials installed

Labor hours expended by task



What information is most important to collect in job cost system?

a) Hours

21 50© 2013 CFMA. All rights reserved.

b) Dollars spent

c) Quantities of materials installed

d) Equipment hours used

e) Depends on what type of contractor you are



Need to “drill down” to lowest level of detail

General Ledger

Detail AccountsLaborMaterialsSubcontractorsEquipmentIndirect Costs

Components of Job Cost

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Indirect Costs

Job #1Cost by Phase Job #5

Cost by Phase

Job #3Cost by Phase

Job #2Cost by Phase

Job #4Cost by Phase


• Original Estimate

• Actual Cost to Date

• Cost to Complete

Components of Job Cost Report

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• Costs at Completion

• Over/Underruns (variances)


Construction Costs IncludeDirect Job Costs

Indirect Job Costs (charged to job)

I di t C t

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Indirect Costs (classified as contract costs but may not be allocated to job)




Direct Job CostsMaterial

Labor

Subcontractors

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Equipment (rentals & installed)

Other


Indirect Job CostsIndirect labor

Contract supervision

Tools & consumables

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Insurances

Owned equipment costs

Other


Construction Costs ExcludeGeneral & Administrative Expense

Selling Expense

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Boats, airplanes, vacation homes, snowmobiles, etc.

Pre-contract costs normally excluded




Construction Costs vs. Overhead

Does the cost relate to the performance of a particular job in progress?

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Does the cost relate to the contractor’s construction activities?


Allocating Indirect Costs

Cost Pools

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Allocation Methods


Report Review and Discussion

Understanding Levels of Detail

Connection of Quantity vs. Cost & Man Hours

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Cost Types vs. Work Activities




TAB-3: Job Cost Summary & Detail

TAB-4: Cost Type Identification & Allocation Chart

Workbook TABS-3,4,5

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TAB-5: Job Cost Chart


“The Basics”Section Five:

Revenue Recognition


Revenue Recognition TopicsBodies of knowledge available:

– ARB No. 45 and ASC 605-35

– “The Book” – Chapter 4

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The Book Chapter 4

Model financial statements - WIP

Unique attribute of contractor financials




Contract Value IncludesBasic Contract Value

Contract Options and Additions +/-

Change Orders +/-

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Change Orders +/-

Claims +/-

Incentive/Penalty Provisions +/-


Polling Question #4:Would you recognize revenue on pending/unapproved c/o’s or claims?

a) YES


)

b) NO

Methods of Computing Percent Complete

Percentage-of-Completion (PCM)(cost-to-cost method)

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Labor Efforts

Units of Production




Estimating Costs to Complete

How important is this step?

Key test of Project Manager’s foresight

K tt ib t f li bl J b C t

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Key attribute of reliable Job Cost Management System

An art, not a science


Estimated Costs to Complete

Basis of WIP # is a cost system

Requires regular, periodic comparisons to budgeted costs

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Computed differently @ cost code level (yes?)

Reflect all costs associated with performance of contract?


WIP ComponentsPercentage-of-CompletionCost-to-Cost Method

– Total Contract Value– Costs Incurred to Date

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Costs Incurred to Date– Estimated Costs @ Completion

What’s 4th component?




EARNED REVENUE – BILLINGS = CIEB or (BIEC)

Example: Contract Value $ 1,200,000Estimated cost 1,000,000Estimated Gross profit 200,000Costs incurred to date 500,000


Costs incurred to date 500,000% Complete 50%Billings to date 500,000Earned Revenue ( 50%) 600,000Under Billings (CIEB) 100,000

CIEB = Cost and estimated earnings in excess of billings on uncompleted contract.

Gross MarginQuestion: What key piece of new data does a management accountant need each month to calculate gross margin?

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Answer: Costs incurred, costs to complete, revised contract amount and billed to date.


Overview of Change OrdersRecognize as soon as measurable –especially if resulting in loss of profit

Was work already performed?

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Are costs recoverable or non-recoverable?




UNAPPROVED

Include Change Order in Revenue and Costs

Costs result in reducing gross profit

Change Order

NO

APPROVED

Probable that Change Order costs will result in change in contract?

Accounting for Change Orders

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Change Order greater than costs?

YES

YES

NO Contract revenue recognized at the lesser of cost or anticipated revenue

contract?

Revenue in excess of cost recorded only if assured beyond a reasonable doubt


Overview of ClaimsUsually involve contract scope and/or timing issues

Six broad categories:– Delay

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y– Disruption– Changed Conditions– Changes in Scope– Acceleration– Termination


End of Section Five and Day 2 Wrap-Up / Q&AAnthony R. Stagliano, CPA, CCIFPNational Director of Construction Industry ServicesCBIZ & Mayer Hoffman McCann P.C.Phone: 610-862-2420Email: tstagliano@cbiz com


Email: [email protected]: www.mhm-pc.com

Kevin Foley, CCIFPChief Financial OfficerE. Allen Reeves, Inc.Phone: 215-884-2255 – Ext. #123Email: [email protected]: www.eareeves.com



Review Question #1Who is the primary audience for the job cost report?

A. Estimators

B Sureties/Bankers

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B. Sureties/Bankers

C. Project Managers

D. Company Management


Review Question #2Which is not a direct cost of a project for an electrician?

A. Subcontractors hired

B Fixtures

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B. Fixtures

C. Labor to install fixtures

D. Trailer to store fixtures onsite

E. Lift rented for installation work


Review Question #3

When do you recognize a change order in the financials?

A. When the CO work begins

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B. When the CO is presented to the Owner

C. When the CO is signed by the Owner

D. When the CO work is completed




Thank You For Your Participation!Don’t forget to join us for Session 3

Thursday, Dec. 5, 2013 3:00-5:00 PM EST

Continue the discussion on “The BASICS of Construction Accounting” live on CFMA’s Connection Café!


For questions about this program contact:Ariel Sanchirico, Associate Director of Education, CFMA, 100 Village Blvd., Suite 200, Princeton, NJ 08540, Email: [email protected] Phone: 609.945.2433

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