construction job cost accounting

construction job cost accounting

Effective Cost Accounting Strategies for Construction Projects

1. Introduction to Construction Job Cost Accounting

Earlier controlled cost studies have been identified. Labor costs typically exceed those of the total labor burden, and they often exceed the total sum of all other construction costs incurred on a project. Furthermore, it is universally accepted that direct labor costs closely correspond to the level of production efficiency in the industry. Not surprisingly, the inability to closely manage the labor component of the total project cost has continually been cited in the literature as a contributing factor to the erosion of the contractor’s historical profitability. As organizations primarily rely on or embrace job cost accounting and reporting systems, the salient cost accounting functions are examined. Then, cost accounting of different on-site and off-site activities is also examined. It is argued that the above-mentioned paper concludes that the widespread availability of advanced cost accounting systems, cost accounting education/training, as well as a lack of pricing flexibility, often result in inferior firm performance. Moreover, it is possible that a convergence of these three issues can be related to the absence of the job cost accounting and control emphasis within the marketplace.

Effective cost accounting and reporting strategies, which can aid project managers in maintaining profits and staying competitive within the construction services field, include maintaining efficient field office, shop, and job site on a “cycle basis”; reducing material and outside services costs through the implementation of effective purchasing functions; maintaining effective jobsite facilities, and deploying more production and labor reporting and control activities. In this paper, strategies to reduce or control labor costs have been evaluated. It is clear that although no single solution can fit all project situations, the increasingly competitive construction environment is compelling construction professionals to undertake a more aggressive and effective analysis of project costs. Such an aggressive analysis will assist project managers in maintaining more successful performance indices for a construction project through the identification and control of production inefficiencies and the utilization of construction initiatives, in contrast to cost control emphasis.

2. Key Components of Construction Job Cost Accounting

A final feature of effective accounting control is frequent updating of job cost reports. With today’s technology, it should now be possible to complete jobs on a weekly basis both for in-house and construction team input and feedback. Many construction control functions can be carried out more effectively if job cost reports are available at midweek rather than on Monday morning when all surprises, both good and bad, have already occurred. This is especially true on big projects involving big billing amounts for labor and material payments. A constant real-time flow of valid accounting information allows both better business planning and business results. It allows the preparation of responsibility-cost reports of use for management, administrative, and construction team control and reference. In turn, responsibility-cost reports are useful computer reports containing current budgeted data and cost trends for a given week-to-date.

The foundation of all management information for a construction business is job cost accounting. Most other management reporting comes from sorting the detail accumulated by job cost accounting. Job cost accounting has four components. First, detailed daily costs must be properly compiled. Job progress must be reported to date at the close of each period. The labor, material, and additional costs incurred to date must be allocated, recognized, and accumulated properly. Finally, the total cost to complete the project must be accurately forecast. Failure to perform accurately and completely one or more of these accounting components causes inefficient construction management. It would be impossible to keep a job on schedule, keep a job within budgeted cost, and update cost estimates for future projects without job cost accounting.

3. Challenges and Solutions in Implementing Cost Accounting in Construction Projects

3.2 Solutions for Barriers Managers in large organizations have a tendency to start out very ambitiously. More talk, less action is something which is very common in construction costing. Recognizing that these problems will exist, therefore, as a first essential step, the organization can admit it has areas of emulation and develop organizational strategies to manage all expected challenges. These strategies may include pooling scarce, expert resources, postponing establishing an organic industry culture that desires and demands full and accurate costing information and management, and using high-level risk analysis to maximize the project’s chances of success. In order to make strategic accounting data collections possible, the organization should have the ability to link individual data within comprehensive, large and/or high-quality databases and then effectively protect them from unauthorized disclosure. Furthermore, contractors must have the freedom to choose accounting software their executives are most comfortable with and at the same time be provided with training that brings them along at the appropriate speed in order to start comprehensive costing data collections without disrupting overall project progress.

Use cost accounting only when specific triggers are reached: In projects of high fixed cost and option value nature, decision-makers understand that small changes in the price of an underlying may lead to larger percentage changes in the value of the option, and thus the decision-maker will be inclined to use cost accounting in projects only when specific triggers are reached, rather than integrating cost accounting throughout the entire project which values the work and information. In short, accountants would have to make substantial compromises with respect to accounting estimates.

3.1 Barriers in Implementing Cost Accounting in Construction Projects Attend to a range of diverse functions: Managers in construction projects attend to a range of different functions. Within each function, there are a large number of tasks to be performed. Construction projects are often described as fragmented, partially-delivered monstrosities, and it would be unwise for an organization to try to develop a comprehensive cost accounting system for each and every separate project activity. Needless to say, intensive computation is required for the application of the cost accounting system to the scattered sectors.

In this time of construction boom and hyper-tenacity, controlling costs and implementing an effective cost accounting system has become a foremost problem faced by the construction industry. Within the overarching, permanent system of accounting used by an organization, there are numerous separate systems or parts (cost accounting system being one) that overtly focus on accurately reporting different aspects of the organization’s performance. However, implementing cost accounting is a challenging task, especially for construction projects. The bailout from the problem involves developing strategic plans to encounter and neutralize these challenges.

4. Best Practices and Strategies for Optimizing Construction Job Cost Accounting

When a large publicly traded entity wants up-to-date financial information about its construction project, a higher level of job cost accounting for construction projects is achieved. For those large entities, detailed reports that identify unallowable costs are often needed to separate overhead costs. Overhead costs cannot be charged because these costs are the responsibility of the firm’s existing assets. Overhead costs do not benefit the asset on the job site, whereas direct costs or job costs are those costs paid and benefits by the asset. Each type of cost must be accounted for differently. For example, while overhead costs are reviewed by an auditor to determine if all charges pertain to the project, payroll costs may be less detailed. Payroll costs involve many complex issues because of labor and payroll laws. Even after the check is written, an auditor’s audit examines details such as payroll tax filing obligations and ERISA plan filing requirements. Accurate financial reporting is required. Information must be available in real time to those assigned to the task of saving the asset on the job site the most precious commodity: time.

Many contractors struggle with finding the best way to set up their job cost accounting system. Through a combination of the employer’s choice of officers, general ledger, chart of accounts, and the use of certain labor/job cost reporting devices, job cost success can be achieved. A profit plan is one of the key documents a contractor will use. It allows the company’s executive team to decide which strategies to pursue when bidding on a project. A profit plan offers the contractor a way of continually bettering the firm by monitoring profit, volume, source of workload, and controlling overhead. The keyword in successful profit planning is accountability. An external or internal accounting software program usually follows. The sophistication of the software must be compatible with the contractor’s management abilities.

5. Case Studies and Real-World Applications of Cost Accounting in Construction

As certification programs for cost accounted construction projects gain acceptance, industry practitioners and educators are producing increasingly detailed documentation of the requirements, methodologies, and benefits associated with the use of accounting concepts. Procedures that are common in other industries, such as earned value analysis (EVA), take on special significance for projects that have substantial ongoing costs, involve unique technologies, and require the coordinated efforts of specialists in widely varying disciplines. This chapter looks at construction industry case studies and real-world issues related to: project and activity classes, project costs versus project revenue, initial assessment of project profitability, performance planning, performance measurement and reporting, and applying cost accounting techniques for real-time problem solving.