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

Minimum Bottom Line Profit Should Average 9.4%!
For Trades & Subcontractors, at Least 11%
After Income Taxes Are Paid!

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. Again, the process is simple: simply see where your mistakes impact the financial status of the company and make the necessary adjustments and monitor the change via the financial results. It is a continuous process. 

Phase accounting for sections six and seven (item codes) covers the walls and flooring in the standard residential construction process. This article details out these two areas of construction.  

Preface 

If you haven’t already read the first two articles related to phase accounting, please read them before delving into this particular article. This is a part of a series and for you to fully understand and appreciate Part III, read the following: 

  • Use Phase Accounting in Construction – covers the concept of phase accounting and explains phase one addressing project management costs, phase two which deals with site development and landscaping, phase three restricts itself to the foundation and finally phase four which is the framing of the house.
  • Use Phase Accounting in Construction – Part II – this particular article restricts the accounting function related to the subcontractors used for electrical, plumbing and mechanical. It does touch a little bit on some of the newer trades such as communications and water/sewer. Typically, water/sewer is a function of the site development due to the required licensing restrictions. 

I also seriously urge you to read about Class Accounting in Construction as this has a big bearing on the overall results in your reports. 

Finally, I want to remind the reader why I write these articles. I’m here to help you become a better business operation. I don’t provide simple one word or a short paragraph answer to problems. This is business, and I’m telling you that it takes perseverance to become a really successful business entrepreneur. YOU ARE GOING TO MAKE MISTAKES! This is normal and you should expect this. By implementing my suggestions, you will create a feedback loop process that allows you to discover problems, correct them and ultimately maximize your profitability in business. This is not going to happen overnight. If you want this to happen today, go to a different website; I am not your guy to help you. And honestly, you would be a fool to think you could solve business problems with a simple answer. It just isn’t true. Read my articles with the intention of learning about the respective issue and how you can implement the methods I advocate. 

Walls 

Phase code six encompasses the walls of the home. As the costs relate to the walls, the following are the groups that should be charged to code six: 

  • Insulation – this includes not only the wall insulation, but the ceiling insulation too. Furthermore, insulation between the floors (basement and the first floor) is included here. In the attic, any baffles or access stairway insulation is included. In addition, include vapor barriers, attic vents not included in the framing section, pipe insulation not provided by the plumber as a function of trades, and specialty items.
  • Sheetrock/Wallboard – most contractors supply the rock and mud and hire an outside subcontractor to hang the boards and mud the joints.
  • Painting – primer coat for the final skimming job and the two base coats along with all painting is included in the phase code for walls. Most painters include the painting of interior and exterior trim along w/the doors and customized cabinets. In effect, the entire paint job for the house should be included in the walls section. Typically the very first line entry in this section is the exterior trim paint job for the fascia and soffit on the exterior prior to the roofing nailing down the shingles. Most painters will do this because they can spray paint away without worrying about over spray onto the roof or siding as neither item has been installed yet. Some contractors will separate the exterior painting from interior and assign the exterior as a function of framing. The key is to be consistent in assignment of costs.
  • Interior Trim – I like to include the entire trim job as a function of the walls including the hanging of the interior doors. Sometimes I’ve seen the accountant include the installation of the hardware (door knobs, window latches etc) posted to this phase too. The key for you is to be consistent where you post the information. Remember, this is about comparing phases in the future. If you put hardware here and then a year from now post hardware to the final phase down in section nine, it will be difficult to understand the reports when comparing costs several years from now.
  • Also, include any wallpaper, decorative items, and closet items in this section too. 

Flooring 

After walls come code section seven, floors. The interesting aspect of flooring is that in MOST cases, flooring is an allowance item. I have written an article addressing the proper handling of allowances, read Allowances-in-New-Home-Construction-Contracts-the-Business-Model. The contractor should include those costs associated or tied directly to flooring. These include: 

  • Carpet
  • Vinyl flooring
  • Hardwood
  • Tile
  • Include the associated hardware for all of the above such as transition strips, reducers, thresholds and moldings
  • Stone – do not include exterior stone for walkways, porches or decks. These are typically a function of code section nine which addresses extras. 

The secret here is that flooring is most often an allowance item and this is the primary reason to have its own code section. 

Other Issues 

Let’s explore some obvious issues that are traditional in most home construction processes. Where do we post things like: 

  • Stairway and the Railings – good question, remember the key to all of this, BE CONSISTENT. If you post this data to the framing section, then always post this information there. The best way to address this is to think about this up front. For me, I look at this as two different types of stairs. There are the traditional types that are not included in allowances, normally the straight up and down stairs. To me this is a part of the interior trim; therefore, include those costs in code section six. However, in custom homes, stairs are sometimes allocated to the allowances. This is because the stairway is not traditionally straight up and down. You often see multiple tiers with landing sections or you have customized railings or even a customized handrail. You may even get one with a chair lift. Where would you go with this? In my opinion, I would keep this in section seven because it relates to allowance items. It doesn’t relate to floors very well, it is definitely closer to the wall function; but because this type of stairway is highly customized and an allowance item, you may have more success by posting the expenses in seven. But whatever you decide, do it the same way in the future! This is the only way you can compare future estimates to prior accomplishments. A simple answer is:
    • Straight up down types without amenities – Code Section Six
    • Customized Railing, Handrail and Steps – Code Section Seven
  • Bathroom Wall Tile – In my next phase accounting article I explore the kitchen items including tile on the walls for back splashes etc. I normally post this data to the customized section. The reason is that most bathroom tiling is an allowance item and therefore I put it in Section Eight. But just like the stairway, the key is whether or not it is an allowance item. If allowance, put the cost in section eight, if not an allowance, place the costs with the section for walls.
  • Bookshelves, Cubbies, Closets – note that these costs relate to mounting something to a wall. Therefore, code these costs to section six.
  • Garage Workbench – this one is unusual due to the nature of the garage. Technically the garage is not a living space, but modern day garages are insulated and have wallboard put up. Also, they are finished with a paint job. My thinking is that this cost is more in alignment with an extra than as a function of a wall. Therefore, code section nine is the best spot for this cost. But again, be consistent; if you go with the cost to the walls, then, in the future keep placing that cost there. 

Summary – Phase Accounting (Walls)

I can’t emphasize the importance of consistency because the goal is to compare a future estimate to what has happened in the past. This is referred to as exercising the feedback loop. When this job is set up correctly and the information is recorded in the job description, an estimator in the future researches jobs that will more closely match the current required estimate. Then, by looking at the details within each section, he can closely correlate the historical costs to the current contract. Any issues in the past can be identified easily and a more appropriate estimate is generated for the current job.  

This article illustrated the various types of costs associated with walls and floors. For floors, the costs are customarily allowance items. Finally I explored some types of costs and where to post that respective data. In general I advocate a thinking process to identify the correct cost group. Act on Knowledge.

Value Investing

Do you want to learn how to get returns like this?

Then learn about Value Investing. Value investing in the simplest of terms means to buy low and sell high. Value investing is defined as a systematic process of buying high quality stock at an undervalued market price quantified by intrinsic value and justified via financial analysis; then selling the stock in a timely manner upon market price recovery.

There are four key principles used with value investing. Each is required. They are:

  1. Risk Reduction – Buy only high quality stocks;
  2. Intrinsic Value – The underlying assets and operations are of good quality and performance;
  3. Financial Analysis – Use core financial information, business ratios and key performance indicators to create a high level of confidence that recovery is just a matter of time;
  4. Patience – Allow time to work for the investor.

If you are interested in learning more and receiving good information, reports, charts and recommendations; join as a club member below. Start your investment portfolio today.

Join the value investing club and learn about value investing and how you can easily acquire similar results with your investment fund. Upon joining, you’ll receive the book Value Investing with Business Ratios, a reference guide used with all the decision models you build. Each week, you receive an e-mail with a full update on the pools. Follow along as the Investment Fund grows. Start investing with confidence from what you learn. Create your own fund and over time, accumulate wealth. Joining entitles you to the following:

  • Lessons about value investing and the principles involved;
  • Free webinars from the author following up the lessons;
  • Charts, graphs, tutorials, templates and resources to use when you create your own pool;
  • Access to existing pools and their respective data models along with buy/sell triggers;
  • Follow along with the investment fund and its weekly updates;
  • White papers addressing financial principles and proper interpretation methods; AND
  • Some simple good advice.

Value Investment Club

Please Signup
*
Username
Username can not be left blank.
Please enter valid data.
This username is already registered, please choose another one.
This username is invalid. Please enter a valid username.
*
First Name
First Name can not be left blank.
Please enter valid data.
This first name is invalid. Please enter a valid first name.
*
Last Name
Last Name can not be left blank.
Please enter valid data.
This last name is invalid. Please enter a valid last name.
Website (URL)
Website (URL) can not be left blank.
Invalid URL
Invalid URL
*
Email Address
Email Address can not be left blank.
Please enter valid email address.
Please enter valid email address.
This email is already registered, please choose another one.
*
Password
Password can not be left blank.
Please enter valid data.
Please enter at least 6 characters.
    Strength: Very Weak
    Select Your Payment Gateway
    How you want to pay?
    Payment Summary

    Your currently selected plan : , Plan Amount :
    , Final Payable Amount:
    Submit
    Please follow and like us: