Minimum Bottom Line Profit Should Be > 7%!
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.
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. So read my articles with the intention of learning about the respective issue and how you can implement the methods I advocate.
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 facia 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 overspray 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.
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:
- Vinyl flooring
- 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.
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.