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CFMA’s BASICS of Construction Accounting Session 2: Participant Guide
© 2013 CFMA. All rights reserved. 1
The Basics of Construction Accounting
1© 2013 CFMA. All rights reserved.
An Introduction to Construction Accounting & Financial Management Principles
Day 2
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 2: 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 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 2: Participant Guide
© 2013 CFMA. All rights reserved. 3
Section 4 – Job Cost Reporting
Section 5 – Revenue Recognition
Today’s Agenda: Day 2
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Section 5 Revenue Recognition
© 2013 CFMA. All rights reserved.
“The Basics”Section Four:
Job Cost Reporting
8© 2013 CFMA. All rights reserved.
Polling Question #1:
Does Codification Topic 605-35 require that contractors produce a job cost report?
a) YES
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b) NO
© 2013 CFMA. All rights reserved.
CFMA’s BASICS of Construction Accounting Session 2: Participant Guide
© 2013 CFMA. All rights reserved. 4
Designing the Chart of Accounts for the General Ledger
Begin with the end in mind
Discuss owner’s 5-year vision
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Ask your accountant, surety & banker about common mistakes on financial statements
Design chart of accounts
41© 2013 CFMA. All rights reserved.
Example Chart of Accounts
Number Series Classification1000 Assets
2000 Liabilities & Equity
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3000 Sales & Revenue
4000-8000 Expense (SG&A)
9000 Other Income/Expense
42© 2013 CFMA. All rights reserved.
Subsidiary Ledgers, Including Job Cost
Cash Receipts
A/P
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Job Cost
43© 2013 CFMA. All rights reserved.
CFMA’s BASICS of Construction Accounting Session 2: Participant Guide
© 2013 CFMA. All rights reserved. 5
Job Costing IMPORTANT to agree on a consistent method of Coding for your company.
The job cost reporting system is used by the Estimators Project Managers and the
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Estimators, Project Managers, and the Accounting Department
Resources
44© 2013 CFMA. All rights reserved.
Follow the Money…From Chart of Accounts to Financial Statements
Asset and Liability & Equity Accounts –Balance Sheet
Revenue and Expense Accounts –I St t t
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Income Statement
Statement of Cash Flows
Job Schedule and WIP –Supplemental Schedules
45© 2013 CFMA. All rights reserved.
The Job Cost SystemWhat Is It?
Who Uses It?
Why Is It Important for Contractors?
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Why Is It Important for Contractors?
46© 2013 CFMA. All rights reserved.
CFMA’s BASICS of Construction Accounting Session 2: Participant Guide
© 2013 CFMA. All rights reserved. 6
Job Cost System Objectives
For Management Accountants –
Provide useful information to decision makers
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decision makers
For Project Management –A risk management tool
47© 2013 CFMA. All rights reserved.
Polling Question #2:
Do estimators actually rely on historical job cost information?
a) YES
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a) YES
b) NO
© 2013 CFMA. All rights reserved.
Users of Job Cost ReportsProject Management (primary)
Top Management (important)
Estimator (if proactive)
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Management Accountant (analysis)
External Financial Execs (rare)
Customers – cost-plus auditing
48© 2013 CFMA. All rights reserved.
CFMA’s BASICS of Construction Accounting Session 2: Participant Guide
© 2013 CFMA. All rights reserved. 7
Factors in Cost AccumulationSize and type of contractor
Contract type
Owners
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Bid format
Accounting rules
Management Attitude - KISS principle
49© 2013 CFMA. All rights reserved.
Critical Work Activity Measures
Identifiable phases of work
Specific work tasks or packages
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Quantities of materials installed
Labor hours expended by task
50© 2013 CFMA. All rights reserved.
Polling Question #3:
What information is most important to collect in job cost system?
a) Hours
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b) Dollars spent
c) Quantities of materials installed
d) Equipment hours used
e) Depends on what type of contractor you are
CFMA’s BASICS of Construction Accounting Session 2: Participant Guide
© 2013 CFMA. All rights reserved. 8
Need to “drill down” to lowest level of detail
General Ledger
Detail AccountsLaborMaterialsSubcontractorsEquipmentIndirect Costs
Components of Job Cost
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Indirect Costs
Job #1Cost by Phase Job #5
Cost by Phase
Job #3Cost by Phase
Job #2Cost by Phase
Job #4Cost by Phase
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• Original Estimate
• Actual Cost to Date
• Cost to Complete
Components of Job Cost Report
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• Costs at Completion
• Over/Underruns (variances)
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Construction Costs IncludeDirect Job Costs
Indirect Job Costs (charged to job)
I di t C t
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Indirect Costs (classified as contract costs but may not be allocated to job)
53© 2013 CFMA. All rights reserved.
CFMA’s BASICS of Construction Accounting Session 2: Participant Guide
© 2013 CFMA. All rights reserved. 9
Direct Job CostsMaterial
Labor
Subcontractors
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Equipment (rentals & installed)
Other
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Indirect Job CostsIndirect labor
Contract supervision
Tools & consumables
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Insurances
Owned equipment costs
Other
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Construction Costs ExcludeGeneral & Administrative Expense
Selling Expense
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Boats, airplanes, vacation homes, snowmobiles, etc.
Pre-contract costs normally excluded
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CFMA’s BASICS of Construction Accounting Session 2: Participant Guide
© 2013 CFMA. All rights reserved. 10
Construction Costs vs. Overhead
Does the cost relate to the performance of a particular job in progress?
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Does the cost relate to the contractor’s construction activities?
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Allocating Indirect Costs
Cost Pools
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Allocation Methods
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Report Review and Discussion
Understanding Levels of Detail
Connection of Quantity vs. Cost & Man Hours
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Cost Types vs. Work Activities
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CFMA’s BASICS of Construction Accounting Session 2: Participant Guide
© 2013 CFMA. All rights reserved. 11
TAB-3: Job Cost Summary & Detail
TAB-4: Cost Type Identification & Allocation Chart
Workbook TABS-3,4,5
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TAB-5: Job Cost Chart
© 2013 CFMA. All rights reserved.
“The Basics”Section Five:
Revenue Recognition
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Revenue Recognition TopicsBodies of knowledge available:
– ARB No. 45 and ASC 605-35
– “The Book” – Chapter 4
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The Book Chapter 4
Model financial statements - WIP
Unique attribute of contractor financials
62© 2013 CFMA. All rights reserved.
CFMA’s BASICS of Construction Accounting Session 2: Participant Guide
© 2013 CFMA. All rights reserved. 12
Contract Value IncludesBasic Contract Value
Contract Options and Additions +/-
Change Orders +/-
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Change Orders +/-
Claims +/-
Incentive/Penalty Provisions +/-
63© 2013 CFMA. All rights reserved.
Polling Question #4:Would you recognize revenue on pending/unapproved c/o’s or claims?
a) YES
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)
b) NO
Methods of Computing Percent Complete
Percentage-of-Completion (PCM)(cost-to-cost method)
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Labor Efforts
Units of Production
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CFMA’s BASICS of Construction Accounting Session 2: Participant Guide
© 2013 CFMA. All rights reserved. 13
Estimating Costs to Complete
How important is this step?
Key test of Project Manager’s foresight
K tt ib t f li bl J b C t
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Key attribute of reliable Job Cost Management System
An art, not a science
65© 2013 CFMA. All rights reserved.
Estimated Costs to Complete
Basis of WIP # is a cost system
Requires regular, periodic comparisons to budgeted costs
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Computed differently @ cost code level (yes?)
Reflect all costs associated with performance of contract?
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WIP ComponentsPercentage-of-CompletionCost-to-Cost Method
– Total Contract Value– Costs Incurred to Date
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Costs Incurred to Date– Estimated Costs @ Completion
What’s 4th component?
67© 2013 CFMA. All rights reserved.
CFMA’s BASICS of Construction Accounting Session 2: Participant Guide
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EARNED REVENUE – BILLINGS = CIEB or (BIEC)
Example: Contract Value $ 1,200,000Estimated cost 1,000,000Estimated Gross profit 200,000Costs incurred to date 500,000
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Costs incurred to date 500,000% Complete 50%Billings to date 500,000Earned Revenue ( 50%) 600,000Under Billings (CIEB) 100,000
CIEB = Cost and estimated earnings in excess of billings on uncompleted contract.
Gross MarginQuestion: What key piece of new data does a management accountant need each month to calculate gross margin?
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Answer: Costs incurred, costs to complete, revised contract amount and billed to date.
© 2013 CFMA. All rights reserved.
Overview of Change OrdersRecognize as soon as measurable –especially if resulting in loss of profit
Was work already performed?
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Are costs recoverable or non-recoverable?
68© 2013 CFMA. All rights reserved.
CFMA’s BASICS of Construction Accounting Session 2: Participant Guide
© 2013 CFMA. All rights reserved. 15
UNAPPROVED
Include Change Order in Revenue and Costs
Costs result in reducing gross profit
Change Order
NO
APPROVED
Probable that Change Order costs will result in change in contract?
Accounting for Change Orders
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Change Order greater than costs?
YES
YES
NO Contract revenue recognized at the lesser of cost or anticipated revenue
contract?
Revenue in excess of cost recorded only if assured beyond a reasonable doubt
69© 2013 CFMA. All rights reserved.
Overview of ClaimsUsually involve contract scope and/or timing issues
Six broad categories:– Delay
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y– Disruption– Changed Conditions– Changes in Scope– Acceleration– Termination
70© 2013 CFMA. All rights reserved.
End of Section Five and Day 2 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
45 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
CFMA’s BASICS of Construction Accounting Session 2: Participant Guide
© 2013 CFMA. All rights reserved. 16
Review Question #1Who is the primary audience for the job cost report?
A. Estimators
B Sureties/Bankers
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B. Sureties/Bankers
C. Project Managers
D. Company Management
© 2013 CFMA. All rights reserved.
Review Question #2Which is not a direct cost of a project for an electrician?
A. Subcontractors hired
B Fixtures
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B. Fixtures
C. Labor to install fixtures
D. Trailer to store fixtures onsite
E. Lift rented for installation work
© 2013 CFMA. All rights reserved.
Review Question #3
When do you recognize a change order in the financials?
A. When the CO work begins
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B. When the CO is presented to the Owner
C. When the CO is signed by the Owner
D. When the CO work is completed
© 2013 CFMA. All rights reserved.
CFMA’s BASICS of Construction Accounting Session 2: Participant Guide
© 2013 CFMA. All rights reserved. 17
Thank You For Your Participation!Don’t forget to join us for Session 3
Thursday, Dec. 5, 2013 3:00-5:00 PM EST
Continue the discussion on “The BASICS of Construction Accounting” live on CFMA’s Connection Café!
49© 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