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New Home Construction

As an owner of a residential contracting business your profits should average 5 to 9 percent per year.  This profit excludes your personal salary of $80,000 to $120,000 per year.   Therefore, if you are contracting around $1.5 million per year, you should be generating no less than $150,000 per year in take home compensation for your efforts.  If not, you are doing something wrong.  

This section is designed to help the contractor discover how to improve the bottom line and achieve financial success in this industry.

This industry’s scope from the main contractor to the workers of the subcontractors is reviewed.  The articles help establish good models to operate within and develop measurement tools.  Use my experience and learn from my errors and successes to improve your business operation.

Products:  Software/Spreadsheets/Documents

Please understand that below are business related articles.  They are in-depth and educational in nature.  The primary goal of each article is to educate and provide insight, guidance and knowledge to the small business entrepreneur.

If you need help, I’m here to assist you.   I have deep knowledge about how to set up cost accounting (project accounting) and tie it to financial accounting.   Allow me to identify your needs and render solutions.   The changes will greatly impact your bottom line and reduce your stress from the increase in cash flow.   Contact me dave@businessecon.org; I usually respond within a few hours.   My rates are reasonable and I’m very responsive.

If interested in my services as an accountant/consultant; click on ‘My Services‘ in the footer of this article.

  • Cost Accounting – Case Study

    Cost Accounting - Case StudyCost accounting is an effective internal accounting process to evaluate company performance at the product/project level. This content is for Bronze, Silver, One-Time and Contractor's Diagnostic members only.Log In Register
  • A Model of Excellence

    Sharp PencilBy using a concept of feedback and making changes to the business operation, a model of excellence can be achieved.  This model allows the contractor to not get nickeled and dimed to the point of going out of business. This content is for Bronze, Silver, One-Time and Contractor's Diagnostic members only.Log In Register
  • Use Phase Accounting in Construction – Part I

    New Home ConstructionThe most effective form of a financial feedback loop in residential construction is phase accounting.  Phase accounting is a subset of cost accounting and generates accurate information in the world of new home and residential additions for small contractors building up to 20 houses per year. This content is for Bronze, Silver, One-Time and Contractor's Diagnostic ...
  • Use Phase Accounting in Construction – Part II (Trades)

    This section covers the three traditional trades that require a license from their respective state. This is your HVAC installer, the electrician and the plumber.  In some contractor may wish to include the septic tank and water well installer.  However, I prefer these two be included in the site development phase as they do impact ...
  • The Financial Truth about Flipping Houses

    Flipping HousesThese two partners in Texas bought a house, fixed it up, and then sold the house.  The show illustrated that they made $52,000 from the deal.  Really?  I have yet to see a deal like that in my accounting experience. This content is for Bronze, Silver, One-Time and Contractor's Diagnostic members only.Log In Register
  • Construction Draw Schedule

    Construction Draw ScheduleA construction draw schedule is a financial tool used by contractors in identifying percentage of completion points in the project for the bank to advance proceeds to the contractor. The construction draw schedule is instrumental in keeping the project moving along.  This content is for Bronze, Silver, One-Time and Contractor's Diagnostic members only.Log In Register
  • What is a ‘Spec’ House?

    Spec HouseWhen a builder constructs a house without a contract, it is known as a spec house or a speculation home.  There are several advantages to the builder to build a spec house including timing, financial gains and workforce retention.  There are advantages to the buyer to purchase a spec house as well.  These include no ...
  • Best Format for the Construction Profit and Loss Statement

    Construction Company Profit and Loss StatementAs a construction company owner, you need a profit and loss statement that conveys information in a format that will identify how much you are truly making as a profit.  The best format is a construction profit and loss statement identifying contract revenues, direct costs, indirect costs and the overhead expenses.  This format most closely ...
  • Capitalizing a New Home Builder Business

    Capitalizing a New Home BuilderBankrolling any startup business is difficult enough.  Capitalizing a new home builder operation is a leap forward in required funds.  Typically, small businesses can be capitalized on a shoestring budget, for a new home contractor, just a little bit isn’t going to work. This content is for Bronze, Silver, One-Time and Contractor's Diagnostic members only.Log In ...
  • Methods to Reduce Costs in New Home Construction

    There are two primary methods of reducing costs of construction.  The first is cost negotiation and the second is cost shifting.  These two methods have several tools in each to achieve overall price reduction.  The following describes each method and the respective tools within each method that you can use to achieve overall cost reduction. This ...
  • What is a Reasonable Profit in Construction?

    Reasonable Profit in ConstructionFor any company, profit is based on the risk reward concept.  With construction, what should be the profit (reward) given the risk?  What is a reasonable expectation given the industry and the particular business?  This content is for Bronze, Silver, One-Time and Contractor's Diagnostic members only.Log In Register
  • The Definition of the Different Types of Residential Contractors

    There are about a half a dozen types of residential contractors.  Each has a different function and goal, this article describes the different types of residential contractors and provides guidance to the reader in understanding the corresponding definition. This content is for Bronze, Silver, One-Time and Contractor's Diagnostic members only.Log In Register
  • How to Use Class Accounting in Construction

    Markup CalculatorClass accounting is a form of accounting whereby the revenues and direct costs are grouped into divisions within the company.  It is a very effective form of accounting in construction.  Learning how to use class accounting in construction is easy and works extremely well with phase accounting. This content is for Bronze, Silver, One-Time and Contractor's ...
  • Completed Contract Method of Accounting in the Construction Industry

    Completed Contract MethodThe completed contract method of accounting recognizes revenue and the associated costs once the project is complete.  This is one of the two popular accounting methods used in the construction industry.  For residential contractors, the completed contract method may have a slight tax advantage by deferring revenue recognition but is generally not considered the best ...
  • Percentage of Completion Method for Accounting in Construction

    Percentage of CompletionIn construction accounting, the percentage of completion method is the preferred tool to account for revenues and direct costs of construction.  If you are an owner of a contracting business, this is the best method of accounting.  This content is for Bronze, Silver, One-Time and Contractor's Diagnostic members only.Log In Register
  • How to Calculate the Best Markup for a Construction Project

    Markup for a Construction ProjectEvery construction project has costs beyond the direct costs and the contractor wants to earn a profit.  To cover these costs he must have an appropriate markup.  The contractor must give consideration to many variables and circumstances to calculate the best markup for a construction project.  To determine the best markup percentage on costs, the ...
  • Implement Cost Accounting in Construction – File Structure

    File StructureTo take the small construction company to the next level of financial success, you must implement cost accounting.   This article is one in a series designed to illustrate how you implement cost accounting in a small construction business.  The first step in this process is design a file structure. This content is for Bronze, Silver, One-Time ...
  • Implement Cost Accounting in Construction – Document Flow System

    This is the second article in a series of articles walking the small business contractor step by step in implementing cost accounting in construction.  This article focuses on designing and developing a document flow system for use in cost accounting.  The next step after creating a document flow system is learning how to sort and ...
  • Implement Cost Accounting in Construction – Processing Documents

    Accounts Payable ManagementIn construction there is little respect for processing paperwork.  Contractors want to build projects, not deal with how paper is managed.  But to gain a true understanding of what it costs to build a project and implement cost accounting, the contractor has to process documents in a meaningful way.  This content is for Bronze, Silver, One-Time ...
  • Construction Draw Schedule – Ranch Model Home

    Contractor's Draw ScheduleThis is a basic draw schedule explanation for an A-frame ranch model home.  This article details the draw schedule format illustrated below.  It details the approximate percentages for the respective phases of construction and explains how the draw schedule is laid out and works. This content is for Bronze, Silver, One-Time and Contractor's Diagnostic members only.Log ...
  • Using QuickBooks in Construction Accounting

    QuickBooksThe key to the software is to properly set up QuickBooks to meet your needs.  You lay out a chart of accounting accounts, buckets to dump data into, then identify your classes of work, create the nine phases of costs (QuickBooks uses item numbers) and finally identify the projects. This content is for Bronze, Silver, One-Time ...
  • QuickBooks in Construction Accounting – Transfer Work in Process to Cost of Goods Sold

    QuickBooks does not have a seamless subrountine to transfer costs from construction in process control accout to the profit in loss statement's cost of construction section. Therefore, the accountant has to export data to a spreadsheet and then sum the respective functional costs of materials, subcontractors, labor, land etc. and then make a ...
  • Allowances in New Home Construction Contracts – The Business Model

    Allowances in ConstructionThis article is designed to help the contractor address the proper procedures and documentation related to allowances in a new home contract.  This content is for Bronze, Silver, One-Time and Contractor's Diagnostic members only.Log In Register
  • Use Phase Accounting in Construction – Part III (Walls & Flooring)

    Phase AccountingThe primary goal of phase accounting is to break out the construction costs into distinct groups in order to assist management in identifying issues related to cost overruns or profitability.  This is a function of the feedback loop method of management which I am advocating to all readers. This content is for Bronze, Silver, One-Time and ...
  • Contractor’s Profitability

    Contractor's ProfitabilityIt costs a lot more than you realize to build a home or perform residential repairs. This article looks at both the homeowner's and contractor's perspective of what one perceives and the other actually incurs. This content is for Bronze, Silver, One-Time and Contractor's Diagnostic members only.Log In Register
  • House Flipping – Business Dynamics

    Flipping HousesThere is a lot of misinformation about flipping real estate on the internet and on television.  I’m mostly shocked by the lack of detailed information related to the entire cost of the project and the adjusted sales price.  I have yet to read a single article that goes into the details of the business dynamics ...
  • Flipping Houses – Proper Inventory Turnover Rate

    Turnover Rate with Flipping HousesIn your typical business operation, turning the inventory over as often as possible has several benefits.  First, it generally reduces overall costs, secondly, it generates greater profits and third, by increasing the profitability, the company has a greater return on equity.  OK, this seems all well and good, but does turning the inventory over in ...
  • Project Accounting Principles for Residential Contractors

    Project Accounting PrinciplesAlmost every residential contractor I had as a client had no clue of their financial position as it related to any one of their residential contracts.  None of them knew whether the project was fully funded, over funded or unfunded at any point in the construction process. This content is for Bronze, Silver, One-Time and Contractor's ...
  • Construction Accounting – Balance Sheet Construction in Process Accounts

    Construction in Process AccountsConstruction accounting consists of three major groups of accounts.  The second major group is located on the balance sheet in the current assets section.  This group is called the ‘Construction in Process’ (CIP) accounts. This content is for Bronze, Silver, One-Time and Contractor's Diagnostic members only.Log In Register
  • Progress Billings in Construction

    Progress BillingsJust like a tip of an iceberg, a progress billing for a construction project is an invoice for a small part of the overall contract value.  It needs to be recorded correctly and presented to management in a way that is understandable and beneficial for making decisions.  This article will introduce the concept and cover ...
  • Branching Out in Construction

    Branching Out in ConstructionTo reduce risk and provide greater security to all parties the small construction company should consider branching out.  What I mean is adding an additional class or line of construction work to the company’s portfolio so that in hard times there are more opportunities for work. This content is for Bronze, Silver, One-Time and Contractor's Diagnostic ...
  • Margins in Construction

    Margins in ConstructionI’ve been asked to identify the average margins in the construction industry.  Honestly, there is no such thing.   I tried and after several hours of research I couldn’t even get one of the types of contractors to have consistency in their numbers.  This content is for Bronze, Silver, One-Time and Contractor's Diagnostic members only.Log In Register
  • Construction Accounting Terminology

    Construction Accounting TerminologyIn construction accounting accountants and bookkeepers use certain terms and there are distinct meanings associated with these terms.  This article is designed to introduce beginner accountants and contractors to these terms from the perspective of financial reporting. This content is for Bronze, Silver, One-Time and Contractor's Diagnostic members only.Log In Register
  • Phase Codes and Cost Codes with QuickBooks and Construction Accounting

    Phase CodesTo simplify and accumulate the total costs, contractors break the house down into functions and quote these respective functional groups and then combine the total amounts for one final estimate.  This type of estimating is oriented towards phases of construction. This content is for Bronze, Silver, One-Time and Contractor's Diagnostic members only.Log In Register
  • Markup Percentage for Remodelers

    Markup PercentageIn the construction industry, remodelers face a different set of criteria than your traditional new home builder.  Because of these issues the markup percentage on costs is generally much higher than other forms of construction.  If you are a remodeler, you need to understand the impact of these issues and how to properly markup your ...
  • Roofer – Business Dynamics

    RooferRoofers depend heavily on labor to accomplish their task.  They are also highly susceptible to weather conditions and dangerous situations.  There are a multitude of issues they face.  If properly managed, an owner of a roofing company can make a good living and profit.  Experience is absolutely the best ally for the roofer. This content is ...
  • Job Cost Reports – Balance Sheet Set

    Job Cost ReportsConstruction accounting uses job cost reports to inform management of progress and existing issues with projects.  There are several different sets of reports.  The balance sheet set functions as an overall financial picture for the company. This content is for Bronze, Silver, One-Time and Contractor's Diagnostic members only.Log In Register
  • Work in Process as a Control Account

    Work in ProcessA control account in the Chart of Accounts is used when there is a need to separate multiple third parties with a similar function. Work in process works perfectly as a control account. This content is for Bronze, Silver, One-Time and Contractor's Diagnostic members only.Log In Register
  • Using Cash in Construction

    Debt or EquityThere is a notion in business that using cash to pay for materials or service is illegal.  IT IS NOT ILLEGAL TO PAY FOR MATERIALS OR SERVICE WITH CASH.  It is illegal to do this if you do not properly document the transaction.  This is especially true in the construction industry. This content is for Bronze, ...
  • Profit Standards for Residential Contractors

    Profit Standards for ContractorsProfit standards for residential contractors vary depending on the type of contractor. In general, the net profit standard for contractors in the upper tier of performance range from 5.8% to as high as 9.6% of sales. This content is for Bronze, Silver, One-Time and Contractor's Diagnostic members only.Log In Register
  • Capitalization of Overhead in Construction – Section 263(a)

    Capitalization of OverheadThere are two exceptions allowed for small business residential contractors to escape the requirements of Section 263(a) - Capitalization of Overhead. The first is the $10,000,000 in sales per year threshold. The second exception is allowed for contractors that build residential homes and are able to complete the contract within two ...
  • Cost Codes – Subset of Item Codes

    Cost CodesCost 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. This content is ...
  • Markup in Construction – Fundamental Understanding

    Markup in ConstructionMarkup has a very simple definition, it is the amount added onto costs to create a sales price.   Notice something really important with that definition, it does not define profit.   It merely defines how much to charge over costs so you can make a profit. This content is for Bronze, Silver, One-Time and Contractor's Diagnostic members ...
  • Open Job Cost Status Report

    Open Job Cost Status ReportThe 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. This content is for Bronze, Silver, One-Time and Contractor's Diagnostic members only.Log In Register
  • The Contractor Subcontractor Relationship – An Understanding

    Contractor Subcontractor RelationshipWith construction, no other mutual bond has such a high dependency on each other as the contractor subcontractor relationship.   If the relationship is developed properly and with a mutual understanding, it can be very successful. This content is for Bronze, Silver, One-Time and Contractor's Diagnostic members only.Log In Register
  • Contractor’s Chart of Accounts – Completed Contract or Percentage of Completion Method

    Contractor's Chart of AccountsThe  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 ...

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