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.
Use Phase Accounting in Construction
Phase Accounting is the best form of cost accounting for contractors. If you are a contractor with contracts greater than $100,000 each, use phase accounting to analyze performance and productivity in your organization.
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 process the documents that come into the office.
Taking a small construction company to the next level of financial success requires implementation of 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.
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.