Construction Accounting Methods
Construction accounting differs from general accounting because of the long-term nature of construction projects and the need to match revenues with costs over the project life. The percentage of completion method recognizes revenue and expenses as the project progresses based on the percentage of work completed. The percentage complete is determined by comparing the costs incurred to date with the total estimated costs, or by physical measurements of the work completed. The completed contract method recognizes all revenue and expenses when the project is completed. The completed contract method is simpler but does not reflect the financial performance of ongoing projects. The choice of accounting method depends on the project duration and the tax regulations. The IRS requires contractors with projects longer than two years to use the percentage of completion method for tax purposes.
The job cost accounting system tracks the costs of each project separately, accumulating labor, material, equipment, and subcontractor costs by project and cost category. The job cost system provides the information needed to prepare progress billings, track profitability, and support cost control decisions. The work in progress schedule compares the total costs incurred to date with the total revenue earned to date for each project. The WIP schedule identifies projects that are over or under billed relative to the percentage of completion. The overbilled projects have billed more than the earned revenue, indicating positive cash flow but potential future losses if the project costs continue to exceed the estimate. The underbilled projects have earned more revenue than billed, indicating negative cash flow that must be funded by the contractor.
The cash flow management in construction is critical because contractors must pay labor and material costs before receiving payment from the owner. The progress payment application submits the earned revenue for the billing period along with supporting documentation. The payment terms in the contract specify the time allowed for the owner to review and pay the application, typically 30 to 45 days. The retainage withheld from each progress payment provides security for the owner but creates cash flow pressure for the contractor. The retention is typically 5 to 10 percent of each payment, with half released at substantial completion and the remainder released at final completion. The contractor’s cash flow must be managed to fund the gap between cost payments and revenue receipts.
Key Design Considerations
The design of any construction element must consider the applicable building code requirements, the loading conditions, the material properties, and the performance criteria. The International Building Code provides the minimum requirements for structural safety, fire protection, and accessibility. The design loads including dead loads, live loads, wind loads, snow loads, and seismic loads are specified by ASCE 7 based on the building location and occupancy. The load combinations in the code ensure that the structure is designed for the most critical combination of loads that could occur during the building life. The material strengths and allowable stresses are specified by the relevant material standards for concrete, steel, masonry, and timber. The deflection limits for beams and floors are specified to maintain the serviceability of the building under normal use conditions.
The construction documents include the drawings and specifications that communicate the design requirements to the contractor. The drawings show the dimensions, locations, and details of the construction. The specifications describe the materials, workmanship, and quality standards. The submittal process requires the contractor to submit product data, shop drawings, and samples for review before ordering materials and beginning work. The field quality control includes inspections and testing to verify that the construction conforms to the contract documents. The commissioning process verifies that the building systems are installed and operating according to the design intent. The owner’s manual and as-built drawings provide the information needed for the operation and maintenance of the completed facility.
Construction Methods and Best Practices
The construction methods used for each type of work must follow the industry standards and manufacturer recommendations to achieve the required quality and performance. The proper installation of construction materials begins with the preparation of the substrate to ensure that it is clean, dry, and sound. The surface preparation for concrete placement includes the compaction of the subgrade, the installation of the reinforcement, and the setup of the formwork. The placement and consolidation of the concrete must achieve complete filling of the forms without segregation or honeycombing. The curing of the concrete maintains the moisture and temperature conditions needed for the hydration reaction to proceed and achieve the specified strength.
The quality control program for construction includes the inspection of materials upon delivery, the observation of work in progress, and the testing of completed work. The inspector verifies that the materials meet the specifications and are stored properly to prevent damage. The observation of the work in progress identifies any deviations from the contract documents that must be corrected before the work is concealed. The testing of the completed work verifies that the installed materials achieve the specified performance. The documentation of the inspection and testing results provides the record of quality for the project. The non-conformance report documents any work that fails to meet the specifications and tracks the corrective action to completion.
Maintenance and Long-Term Performance
The long-term performance of construction materials depends on the quality of the initial installation and the maintenance provided over the service life. The exposure to weather, usage, and environmental conditions gradually degrades materials over time. The regular inspection of the building systems identifies any deterioration or damage that requires repair. The preventive maintenance program schedules the cleaning, lubrication, adjustment, and replacement of components at regular intervals to extend the service life. The service life of building components varies widely, from 10 years for roof coverings to 50 years or more for structural elements.
The rehabilitation of deteriorated construction elements requires the assessment of the existing condition, the selection of appropriate repair methods, and the proper execution of the repair work. The condition assessment includes visual inspection, non-destructive testing, and material sampling to determine the extent of deterioration. The repair method is selected based on the cause of the deterioration, the material type, and the performance requirements. The surface preparation for repairs includes the removal of deteriorated material, the cleaning of the substrate, and the application of bonding agents. The repair material must be compatible with the existing material in terms of strength, stiffness, and thermal expansion. The quality control of the repair work verifies that the repair achieves the required bond strength and performance.
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