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CFMA’s BASICS of Construction Accounting Session 1: Participant Guide
© 2013 CFMA. All rights reserved. 1
The Basics of Construction Accounting
1
An Introduction to Construction Accounting & Financial Management Principles
Day 1© 2013 CFMA. All rights reserved.
This presentation and all associated materials (including but not limited to workbooks, handouts, CD-ROMs, etc.) are copyrighted by CFMA and may not be altered, adapted, reproduced, or redistributed in any manner without express written permission from CFMA’s Vice President of Content Management and Education and/or Chief Operations Officer
Copyright Notice
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Management and Education and/or Chief Operations Officer. Unauthorized use of any CFMA copyrighted materials is expressly forbidden by law.
Questions regarding usage and content should be directed to:CFMA, 100 Village Blvd., Suite 200, Princeton, NJ 08540Phone: 609-452-8000 E-Mail: [email protected] Web: www.cfma.org
© 2013 CFMA. All rights reserved.
Special Thanks to…Gordon Marshall, Faith McDermott, Mary Davolt, Jill Stone and Tony StaglianoWe are grateful for their time, talent, and diligencein the creating and updating of this course and materials
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materials.
It is because of the dedication of our volunteer members that CFMA continues to be The Source & Resource for Construction Financial Excellence.
Questions concerning content, etc. should be directed to [email protected].
© 2013 CFMA. All rights reserved.
CFMA’s BASICS of Construction Accounting Session 1: Participant Guide
© 2013 CFMA. All rights reserved. 2
AcknowledgementCFMA would like to acknowledge…
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as the official sponsor of “The Basics of Construction Accounting” course
and all of CFMA’s WebLive Programs
© 2013 CFMA. All rights reserved.
Program ScheduleDay 1: Thursday, Nov. 14, 2013 – 3:00-5:00 PM EST
Day 2: Monday, Nov. 25, 2013 - 3:00-5:00 PM EST
Day 3: Thursday, Dec. 5, 2013 - 3:00-5:00 PM EST
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Day 3: Thursday, Dec. 5, 2013 3:00 5:00 PM EST
Day 4: Thursday, Dec. 12, 2013 - 3:00-5:00 PM EST
© 2013 CFMA. All rights reserved.
Anthony R. Stagliano, CPA, CCIFPNational Director of Construction Industry ServicesCBIZ & Mayer Hoffman McCann P.C.Phone: 610-862-2420Email: [email protected]: www.mhm-pc.com
Session Presenters
6© 2013 CFMA. All rights reserved.
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Kevin Foley, CCIFPChief Financial OfficerE. Allen Reeves, Inc.Phone: 215-884-2255 – Ext. #123Email: [email protected]: www.eareeves.com
CFMA’s BASICS of Construction Accounting Session 1: Participant Guide
© 2013 CFMA. All rights reserved. 3
Introduction
Section 1 - Industry Overview
Today’s Agenda: Day 1
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Section 2 - Terminology & Authoritative Resources
Section 3 - The Contract Life Cycle
© 2013 CFMA. All rights reserved.
IntroductionPolling Question #1:
Who’s here today?a) GCs
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)b) Specialty Tradesc) Banking/Financiald) Insurance/Suretye) CPA firm – Tax/Auditf) Attorneyg) Business consultant
© 2013 CFMA. All rights reserved.
Our ObjectiveTo provide a basic working knowledge of construction industry accounting principles, procedures, and financial guidelines . . .
9 5© 2013 CFMA. All rights reserved.
CFMA’s BASICS of Construction Accounting Session 1: Participant Guide
© 2013 CFMA. All rights reserved. 4
…So that as Construction Financial Professionals, we can…
Understand what’s being asked by our Key Financial Partners, and ask relevant questions of them.
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This Knowledge Will…Improve communication between:
• Owners
• Company’s Financial Execs &
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Management Team
• Project Managers
• Other Industry Partners
7© 2013 CFMA. All rights reserved.
At the end of all four sessions you will be able to…
Explain the core points of revenue recognition.
Discuss the importance of a job cost system.
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Calculate earned revenue.
Identify what a construction company expectsfrom its financial manager.
© 2013 CFMA. All rights reserved.
CFMA’s BASICS of Construction Accounting Session 1: Participant Guide
© 2013 CFMA. All rights reserved. 5
Polling Question #2:
Have you heard of the WIP or CIP Schedule?
a) YES
b) NO
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b) NO
© 2013 CFMA. All rights reserved.
“The Basics”Section One:
Industry Overview
14© 2013 CFMA. All rights reserved.
Unique Industry Characteristics
Each project is different.
Industry is dominated by small, local, family, or privately owned firms < $10-$50M.
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Revenue is dominated by multi-billion $$$ international & publicly traded corporations.
A/E/C is estimated at 5% of U.S. GDP.
12© 2013 CFMA. All rights reserved.
CFMA’s BASICS of Construction Accounting Session 1: Participant Guide
© 2013 CFMA. All rights reserved. 6
Construction Industry Participants
Owners
Architects/Engineers (A/Es)
General Contractors (GCs)
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Construction Managers (CMs)
Specialty Trades (Subs)
Suppliers
© 2013 CFMA. All rights reserved.
Key Financial PartnersManagement Accountants
Public Accountants/CPAs
Sureties
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Insurance Agents
Bankers
Management Consultants
14© 2013 CFMA. All rights reserved.
Contractor Classifications: SIC & NAIC
SIC NAICS
Industrial & 1541, 1542 23332, 23331
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Nonresidential
Heavy & Highway 1611, 1622, 23411 to 234991623, 1629
Specialty Trades 1711-1799 23511 to 23595
15© 2013 CFMA. All rights reserved.
CFMA’s BASICS of Construction Accounting Session 1: Participant Guide
© 2013 CFMA. All rights reserved. 7
SIC-NAIC Codes
CSI Divisions
Workbook TAB-1
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Types of ContractsFixed Price Hard Bid – 42%
Fixed Price Negotiated – 21%
Cost Plus Fee with Guaranteed Maximum Price (GMP) – 11%
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Unit Price – 9%
Time & Materials – 6%
Cost Plus Fee – 5%
Construction Mgmt. – 3%
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From CFMA’s 2012 Annual Financial Survey
© 2013 CFMA. All rights reserved.
CEO/Owner
Business Construction/ Fi
Sample Construction Company
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Development
Marketing Estimating
Operations
ProjectManagement Safety Site Supers
Finance
Accounting& HR IT Admin
© 2013 CFMA. All rights reserved.
CFMA’s BASICS of Construction Accounting Session 1: Participant Guide
© 2013 CFMA. All rights reserved. 8
“The Basics”Section Two: Terminology &
Authoritative Resources
22© 2013 CFMA. All rights reserved.
Terms Used Today
AMTAMT
AECAECCCIFPCCIFP
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WIPWIP
AMTAMT
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GMPGMP
© 2013 CFMA. All rights reserved.
Authoritative Resources
AICPA Audit & Accounting Guide – Construction Contractors www.aicpa.org
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Financial Accounting Standards Boardwww.fasb.org
IRS construction infohttp://www.irs.gov/businesses/small/industries/index.html
21© 2013 CFMA. All rights reserved.
CFMA’s BASICS of Construction Accounting Session 1: Participant Guide
© 2013 CFMA. All rights reserved. 9
Accounting Updates
Financial Accounting Standards Board (FASB)
International Accounting Standards Board
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International Accounting Standards Board (IASB)
© 2013 CFMA. All rights reserved.
The Body of KnowledgeFinancial Management & Accounting for the Construction Industry (“The Book”)Education & Development Center at www.cfma.org
CFMA B ildi P fit i
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CFMA Building Profits magazine Publications & Resources Center at www.cfma.org
22© 2013 CFMA. All rights reserved.
Revenue RecognitionCash Method
Accrual Method
C l t d C t t M th d
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Completed Contract Method
Percentage of Completion Method (PCM) - 96%– Percentage of Completion (Cost to Cost) 85%– Percentage of Completion (physical % complete) 9%– Percentage of Completion (hours of labor, labor $) 3%
23© 2013 CFMA. All rights reserved.
CFMA’s BASICS of Construction Accounting Session 1: Participant Guide
© 2013 CFMA. All rights reserved. 10
Workbook TAB-2
•Glossary of Terms
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“The Basics”Section Three:
Contract Life Cycle
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Prebid /Bid
Contract Life Cycle
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Contract Performance
ContractAward
ContractCompletion
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CFMA’s BASICS of Construction Accounting Session 1: Participant Guide
© 2013 CFMA. All rights reserved. 11
The ScenarioCFMA Basic Construction Co., Inc. has received an invitation to bid on a project to build a 75,000 sq. foot office building in downtown Smallville. The owner has decided to use the traditional method of construction (an architect and general contractor) and is seeking closed competitive bids for a lump sum contract.
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The architect has already submitted plans and specs to the owner who has approved them. The owner has provided to all bidders a description of the building and a copy of the plans, the location of the building site, due dates, and how to obtain access to any other information the contractor might need.
27© 2013 CFMA. All rights reserved.
The Contract Cycle Exercise
What activities would CFMA Basic Construction Co. perform in each stage of the contract?
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LET’S take about 10-15 minutes to review the four stages.
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Contract Life Cycle ActivitiesPrebid/Bid
Contract Award
C t t P f
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Contract Performance
Contract Completion
29© 2013 CFMA. All rights reserved.
CFMA’s BASICS of Construction Accounting Session 1: Participant Guide
© 2013 CFMA. All rights reserved. 12
Contract Life Cycle Activities
Prebid/Bid – Risk Analysis
• Management reviews invitation, verifies owner credentials,assigns estimator
• Construction site physically inspected, risks identified
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• Estimator makes assumptions on how work is to beaccomplished
• Self-perform/ subcontract decisions are made if appropriate• General conditions costs determined & estimate summarized• Bid submittal paperwork complete/verified (bid bond) &
submitted on timeASSESS RISK
Contract Life Cycle Activities
Contract Award – Plan the Work• Owner sends Notice of Intent to Award or Notice to Proceed• Bonds & insurance secured; PM assigned & team identified• Schedule of Values developed for interim progress billings; also
manpower schedule
35© 2013 CFMA. All rights reserved.
manpower schedule • Estimate converted to budget format on cost system (on the
accounting side, Total Estimated Costs & Contract Value can beidentified)
• Subcontract & Suppliers buyouts completed• Significant risks identified with plan to mitigate risks (i.e.,
improve profit)ASSESS RISK
Contract Life Cycle Activities
Contract Performance - Do the Work• Site mobilized with field crews/job trailers• Site meeting schedules established with subcontractors, safety & owner
36© 2013 CFMA. All rights reserved.
• PM monitors manpower progress: plan vs. actual; also cost commitments, cash flow, lien releases
• Set up administrative procedures such as field requests for information, change order control, submittal tracking, etc.
• On the accounting side, this stage is where billings & collections occur, accounts payable and account disbursements occur and where job progress reports are reviewed, etc.
ASSESS RISK
CFMA’s BASICS of Construction Accounting Session 1: Participant Guide
© 2013 CFMA. All rights reserved. 13
Contract Life Cycle Activities
Contract Completion – Moving On
• Change Orders/Claims Finalized• Punch list completed
37© 2013 CFMA. All rights reserved.
• Final lien releases• Document control/archiving• As-builts, Final submittals, Change orders• Post-mortem/lessons learned & Customer feedback • Feedback from Operations to Estimating• Retention collected• Final cost report
ASSESS RISK
End of Section Three and Day 1 Wrap-Up / Q&AAnthony R. Stagliano, CPA, CCIFPNational Director of Construction Industry ServicesCBIZ & Mayer Hoffman McCann P.C.Phone: 610-862-2420Email: tstagliano@cbiz com
38 31© 2013 CFMA. All rights reserved.
Email: [email protected]: www.mhm-pc.com
Kevin Foley, CCIFPChief Financial OfficerE. Allen Reeves, Inc.Phone: 215-884-2255 – Ext. #123Email: [email protected]: www.eareeves.com
Review Question #1Which is not a key financial partner in the construction industry?
A. Sureties
B Engineers
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B. Engineers
C. Insurance Agents
D. Public Accountants/CPAs
© 2013 CFMA. All rights reserved.
CFMA’s BASICS of Construction Accounting Session 1: Participant Guide
© 2013 CFMA. All rights reserved. 14
Review Question #2Which method of Revenue Recognition is the preferred method for the industry?
A. Completed Contracts
B Percentage of Completion
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B. Percentage of Completion
C. Accrual Method
D. Cash Method
© 2013 CFMA. All rights reserved.
Review Question #3Which item is not part of a contractors prebid/bid work?
A. Physical inspection of job site
B Buyout of subcontractors and/or suppliers
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B. Buyout of subcontractors and/or suppliers
C. Verification of owners credentials/financials
D. Determination of expected general condition costs
© 2013 CFMA. All rights reserved.
Thank You For Your Participation!Don’t forget to join us for Session 2
Monday, Nov. 25, 2013 3:00-5:00 PM EST
Continue the discussion on “The BASICS of Construction Accounting” live on CFMA’s Connection Café!
42© 2013 CFMA. All rights reserved.
For questions about this program contact:Ariel Sanchirico, Associate Director of Education, CFMA, 100 Village Blvd., Suite 200, Princeton, NJ 08540, Email: [email protected] Phone: 609.945.2433