Financial success in construction is tied directly to job costing. Without job costing, financial wellness is likely a product of coincidence than authority within this industry. Implementing job costing in construction is the absolute best financial control a contractor can do to ensure success. Tie cost accounting to the estimating process, and prosperity is all but certain. Rarely does any contractor fail when they implement job cost accounting.
Learn about performance standards and methods to monitor your company’s results against industry standards. There are multitude of tools and principles to guide the business owner to success.
Well developed, accurate and timely estimates are the best tool ensuring profitability in the construction industry. No other internal control mechanism is as valuable to the contractor as the estimate. Good estimating systems in construction provide the management team with the necessary confidence to make long-term decisions benefiting all parties involved with the company. Customers receive a higher quality structure with less warranty requirements, employees get a sense of security with their tenure, and vendors/subcontractors acquire desirable relationships with their contractor assuring delivery of best practices for their respective trades. Simple put, good estimates deliver profits to the contractor.
Estimates in construction are prepared in a similar timeline fashion as project milestones with an overall section to cover those costs that are ongoing throughout the project’s entire time frame. For the purposes of this lesson, the term ‘Phase’ is used to indicate these respective steps of physical construction. In Parts I and II of this series, estimates are created using hard costs of construction; those costs that are directly assignable to the respective project. Throughout this project’s timeline, all assignable costs are keyed to the project and ultimately aggregated by cost type (materials, labor, subcontractor, equipment, other) in the direct costs of construction section of the income statement (P&L statement). To break these costs down into phases, the estimator needs to understand how data in entered into the accounting software. Once entered, the costs can then be accumulated by phase using a customized report from the accounting software. Most accounting software allow an estimate to be entered thus the customized report can compare actual hard costs by phase against the estimated costs by phase. With this report, the construction management team can now hone in on any cost overruns by phase or cost savings.
Estimates are a controlling tool to guide the construction management team towards improved profitability. Estimates by themselves do not generate profits; actual performance creates profitability for the contractor. Estimates act as the technical manual for the project. Once the project is completed, the contractor must compare the actual results against the estimate’s values. In effect, the financial outcomes are evaluated against the originally estimated hard costs. The information gleamed from this evaluation educates the construction management team with what works and any failures. Then end goal, identify poor performance. It is then up to the management team as to how to properly address this issue eliminating this type of mistake in future work. The long-term results are improved profits, higher quality performance, improved customer satisfaction and most importantly, the esprit de corps that comes with team success.
The best internal control tool to maximize profit in construction is an estimate. Estimates act similar to a dashboard of critical information necessary to evaluate overall performance. In insolation, they serve the purpose of determining the minimum core price to charge the customer in order to deliver enough contribution margin to offset that project’s share of indirect and overhead costs. Any value in excess of this core price adds to the company’s bottom line. If properly set up, administered, monitored and evaluated upon completion; estimates are a critical element of the accounting feedback loop. This one internal control tool delivers more value to owners and management in construction than any other control device.
There are four different core legal structures a contractor may select. Each has its own restrictions, advantages and distinct issues requiring knowledge to ensure the best selection. This article will cover the four different structures and the variables that give it advantages over the others. Each structure works well given certain underlying conditions. For a contractor, selecting the right structure will assist in maximizing profit and smooth operations.
To grasp this concept the reader must first understand some history associated with mark-up. Next, a modern approach is adopted which requires an understanding of hard and soft costs. Once the two types of construction costs are incorporated, the contractor will learn how to read and interpret a basic profit and loss statement. With this knowledge and given the various margins for the respective type of contractor they then can calculate the mark-up needed to achieve financial success. It all begins with a little historical perspective.
Success in construction requires control at both the organizational and field operations level. The owner must set the culture; put into place a structure, create policies, implement systems and use procedures to control the end result. Control the outcome and the contractor will earn a good profit and achieve success.
A tool used by a developer, contractor or homeowner to keep the primary party committed to getting the project completed is called ‘retainage’. In effect, retainage means to withhold a small percentage of all payments made until all the work is done. The idea is prevent the contractor, subcontractor or vendor from earning their respective profit until they have completed their agreed upon service.