Industry Standards

Learn about performance standards and methods to monitor your company’s results against industry standards. There a multitude of tools and principles to guide the business owner to success.

Contractor’s Audit Guide – Introduction to IRS Audits

Construction Tax Audit

In 2009, the Internal Revenue Service issued the Construction Industry Audit Technique Guide (ATG) for use by IRS agents and for contractors.   The contractor’s audit guide explains the processes and methods the IRS uses to examine a contractor.   The end goal is to verify actual taxable income over an assigned tax year for a contractor.   The IRS recognizes that this industry is complex and utilizes multiple methods to establish revenue and net profits.   It is so complex, the guide is 257 pages long.

This article introduces the guide and its major sections and how to understand what areas are applicable to your construction company.

Contractor’s Chart of Accounts – Completed Contract or Percentage of Completion Method

Contractor's Chart of Accounts

The  contractor’s chart of accounts is significantly different than the traditional chart of accounts.  First off, the layout is more dependent on the balance sheet than the income statement (profit and loss) accounts.   Furthermore, the income statement accounts are laid out to present a resource based costing presentation than a job costing format.   To add another layer of complexity, the chart of accounts is somewhat oriented to the method of accounting selected by the contractor.

Cost of Services Rendered

Cost of Services Rendered

Service based operations do not use the traditional retail based format for the profit and loss statement which utilizes a ‘Cost of Goods Sold’ section, instead the service industry uses a ‘Cost of Services Rendered’ segment.   The presentation format is very similar though.

Open Job Cost Status Report

Open Job Cost Status Report

The Open Job Cost Status Report identifies a project’s actual costs of construction, amounts borrowed or financed, and any customer payments made to date. The net result is the contractor’s net investment into the respective project.

Cost Codes – Subset of Item Codes

Cost Codes

Cost codes are unique identifiers assigned to items in an inventory sold individually or as a part of an assembly. The goal is to track the final outcome of the item(s) sold against the original estimated cost of the item. It is used in both financial and cost accounting.

Occupancy Rate – How to Evaluate

Temporary housing includes hotels, motels, resorts, apartment complexes and rental homes.   The number one tool to measure performance is occupancy rate.   This is the number of nights the facility is occupied against total available nights. 

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