Direct Costs Archives | Value Investing - Business and Economic Principles

Estimates, Bids and Proposals – Differences Among Offers in Construction

Construction Industry Standards / By David J Hoare MSA / 09/08/2020 02/27/2022

The construction industry uses three distinct terms to offer their services to customers. Estimates, bids and proposals are terms used to present a dollar value associated with construction work. For less sophisticated contractors, the terms are interchangeable. The reality is far different. Each term has an historical context and legal meaning. Thus, it is prudent for any contractor to understand the differences and use the correct term in an accurate way when offering their respective services.

Markup on Materials – Setting the Proper Rate

Construction Industry Standards / By David J Hoare MSA / 07/22/2020 02/27/2022

There is no preset national standard for markup on materials. The Internal Revenue Service’s Construction Industry Audit Technique Guide (May 2009) states that from the Means Contractor’s Pricing Guide include a standard 10% markup on material for profit. However, profit is only one portion of total markup; therefore, markup on materials starts at a minimum 10%. In some cases markup on materials can exceed 100%. This article provides guidance to the contractor, estimator or project manager with setting the markup rates on materials.

Roofer – Business Dynamics

Construction Industry Standards / By David J Hoare MSA / 06/01/2015 01/23/2022

Roofers depend heavily on labor to accomplish their task. They are also highly susceptible to weather conditions and dangerous conditions. 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.

Markup Percentage for Remodelers

Construction Industry Standards / By David J Hoare MSA / 05/20/2015 01/23/2022

In 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 job to cover all your indirect and overhead costs.

Construction Accounting Terminology

Construction Industry Standards / By David J Hoare MSA / 05/15/2015 01/23/2022

In 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.

Use Phase Accounting in Construction – Part III (Walls & Flooring)

Construction Industry Standards / By David J Hoare MSA / 12/13/2014 02/27/2022

The 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.

QuickBooks in Construction Accounting – Transfer Work in Process to Cost of Goods Sold

Construction Industry Standards / By David J Hoare MSA / 01/29/2014 02/27/2022

QuickBooks does not have a seamless subroutine to transfer costs from construction in process control account 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 general journal entry to complete the transfer. This article explains this process in detail.

How to Calculate the Best Markup for a Construction Project

Construction Industry Standards / By David J Hoare MSA / 02/11/2013 02/27/2022

Every 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 contractor should consider his indirect costs, overhead, taxes, and final profit desired.

What is a Reasonable Profit in Construction?

Construction Industry Standards / By David J Hoare MSA / 01/31/2013 02/27/2022

For 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? There is no single correct answer. The construction industry is divided into several significant branches. This article is focused on the residential contractor.

From the new home builder to the re-modeler, a reasonable profit given the risk should be no less than 9% AND this is net after a reasonable salary to the owner for his management role. This is the take home or actual bottom line profit; the amount after taxes. How do you derive such a figure? How do you determine the markup on the construction project to end up with this profit?

Best Format for the Construction Profit and Loss Statement

Construction Industry Standards / By David J Hoare MSA / 01/29/2013 02/27/2022

Construction Company Profit and Loss Statement

As 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 matches the estimating style of most small construction companies.

At the end of the day, it is about the profit you make with your company. This format will point out where the problem is located and where the best performance occurs. When I look at a P&L, I want to quickly identify issues and concerns and get them addressed. If you use this format along with the project accounting reports I illustrate in other articles, not only will you quickly discover any problems, but you can actually pin point the underlying issues and get them resolved. This will add thousands of dollars to your bottom line. So as you read this article, remember you are trying to improve that bottom line, this format is absolutely the best tool to achieve that goal.