Construction accounting exists to provide two key financial points of information to contractors and the management team of a construction company. The first and most important financial point is field production profit. This particular profit measurement is commonly referred to as job profits. It is essential contract revenue less direct (hard) costs of construction. The secondary and almost as important as the primary key financial point is the company’s net profit after taxes. This particular key financial point is the customary financial profit of the company. The first financial point is tied to job costing and therefore, construction accounting is comprised of two different accounting systems. The two systems are job costing and traditional financial GAAP (Generally Accepted Accounting Principles) reporting.
Job costing is a function of accounting whereby certain costs such as materials, labor, supplies and others are assigned a job identifier. This identification system allows management the ability to review costs associated with a job and evaluate performance both financially and physically. Job costing allows for information feedback for improvement in the future.
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.
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.
Job costing reports are management tools used to evaluate project or production performance against a known or estimated standard. They are used in many business sectors and their respective industries. The primary purpose of job costing reports is to identify discrepancies or beneficial results, usually in the form of financial values. They can be used to report both financial and numerical production outcomes.
Phase costing takes accounting to the next level. Phase accounting (costing and accounting are interchangeable at this level of detail) can only be used with job costing. It is designed to break a job down into distinct functions (stages) for analysis. It is a tool to identify discrepancies from estimates.