construction cost accounting

construction cost accounting

Optimizing Construction Cost Accounting: Strategies and Best Practices

1. Introduction to Construction Cost Accounting

The functioning of the project cost accounting system must be understood by company and project cost controllers. Accounting is not only gathering data to fulfill the statutory financial statements requested by authorities and shareholders. It is also exerting control, coordinating resources and budgets to manage the company’s construction projects from conceptual phase through close-out, ultimately resulting in either project completion or project termination.

Today, the construction industry acknowledges that flexible structural cost accounting systems used in competing industries can match the flexibility and financial control performed in construction projects. Nonetheless, construction accountants’ firm belief is that most construction operators do not understand construction cost accounting. The lack of understanding frequently results in poor information needed for authorized decision-making.

Accounting and projecting cash flows and bottom lines for contractors and sub-tier accountants with appropriate reporting are the top-priority goals of construction cost accounting systems.

Establishing a system of compensating and rewarding personnel based on budget and targets can have a remarkable and positive impact on a construction company’s problems. It allows the manager to be proactive and “solve problems miles away from the project” because he is consistently looking at the projected outcome based on the budget and investigating the causes of potential problems.

Cost accounting in construction involves a comparison of actual costs with budget allocations on a daily, weekly, and monthly basis. Indeed, accurate cost accounting maintains financial control over the budget and allocates costs to areas and activities that can be compared with the budget. This is necessary to provide essential feedback for those responsible for the actions that determine the outcome.

2. Key Principles and Concepts in Construction Cost Accounting

Construction accounting is designed to meet the needs of customers from all levels and locations of information, from the front-line supervisor, general construction-level supervisor, project profitability level, and company management team members. Each level of information requires unique accounting and reporting products and customer service strategies. Job costing empowers front-level supervision to control workload levels, quality levels, and other performance levels to maximize profit and customer service responsibility potentials. Profit center level management seeks actual job progress in relation to job budgets to correct negative variances before the project becomes out of control. Back office supervisors want easy, readable, standardized, and reliable construction cost accounting and construction budget information to make decisions that are their domain so they can minimize the company’s operational and financial risks and increase the company’s profit opportunities.

Cost accounting is a management tool that companies use to track and report actual costs compared to budgeted costs on a job-by-job basis. Construction cost accounting shares many attributes with normal cost accounting, with a few significant differences, such as the costs of labor and materials, staging and handling, special insurance requirements, construction bonds, subcontractor payment processes, and issues. The special features of construction accounting also illustrate the differences between normal cost accounting and construction cost accounting principles. However, construction cost accounting should ultimately be performed by construction contractors if they want to profitably manage their businesses or have success with their clients.

3. Challenges and Solutions in Construction Cost Accounting

The role of cost accounting in construction companies is vital because construction cost accounting yields pilot data necessary for the following: bidding for construction work, gathering financial information and preparing financial statements, evaluating investment performance, obtaining statistical data about the construction industry, determining future costs and prices, and carrying out other types of investment analyses.

Research work in the area of accounting is vast. However, research on cost accounting, including construction cost accounting, has been relatively limited. Few international journal articles on the specifics of construction cost accounting are available because the topic of cost accounting is assumed to be included in topics related to financial and management accounting. Cost accounting is one of the components included in the management accounting system, and it is also considered to have organizational significance because it helps the company control and manage construction activities and provides information necessary for various users involved with construction. Specifically, the main function of cost accounting is to calculate the cost of individual projects by using a project cost control system that provides project management with information about the current status of actual costs.

4. Advanced Techniques and Technologies in Construction Cost Accounting

First, with respect to the costing of construction work items, there are several building information modeling (BIM)-based research works concerning either cost modeling during the design phase or cost observation during the construction phase. There are already a few BIM tools that support the integration of work item costs during construction design like Vico Office or Innovaya. The extraction of work item quantities with different costing methods, either manual or automatic, seems like shifting the interests of researchers towards observation using a 5D model, which enables the integration of a time dimension along with the BIM model, for augmented cost and project management complexities. Despite the emphasis on the extraction concept, which is also augmented with new image-based approaches, most of the academic literature interest is related to the integration of work item quantities in the model as a method of cost estimation for construction projects.

In this section, we discuss some advanced techniques that can be used in construction cost accounting. These techniques often employ computer technologies. For example, building information modeling (BIM) makes a valuable contribution to certain project phases and important project-specific issues like constructability. In addition, four-dimensional (4D) CAD systems, which enable an activity-based model to be input into the model in the described sequence and visualized as a video sequence, add a fourth dimension to 3D CAD and enhance user understanding. Moreover, the concept of 5D building models in civil engineering provides time information in the cost data, enabling different time-related issues to be integrated within the model for augmented dimensionality with respect to cost-based construction modeling.