Cost Accounting and Financial Management for Construction Project Managers Proper cost accounting and financial management are essential elements of any successful con- struction job, and therefore make up essential skills for construction project managers and project engineers. Many textbooks on the market focus on the theoretical principles of accounting and finance required for head office staff like the chief financial officer (CFO) of a construction firm. This book’s unique practical approach focuses on the activities of the construction management team, including the project manager, superintendent, project engineer, and jobsite cost engineers and cost accountants. In short, this book provides a seamless connection between cost account- ing and construction project management from the construction management practitioner’s perspective. Following a complete accounting cycle, from the original estimate through cost controls to financial close-out, the book makes use of one commercial construction project case study through- out. It covers key topics like financial statements, ratios, cost control, earned value, equipment depreciation, cash flow, and pay requests. But unlike other texts, this book also covers additional financial responsibilities such as cost estimates, change orders, and project close-out. Also included are more advanced accounting and financial topics such as supply chain man- agement, activity-based accounting, lean construction techniques, taxes, and the developer’s pro forma. Each chapter contains review questions and applied exercises and the book is supplemented with an eResource with instructor manual, estimates and schedules, further cases and figures from the book. This textbook is ideal for use in all cost accounting and financial management classes on both undergraduate and graduate level construction management or construction engineering programs. Len Holm is a senior lecturer in construction management at the University of Washington, USA, and a construction professional with over 40 years’ experience in various roles, including supervi- sion of project managers, estimators, and jobsite cost accountants. He runs his own construction management firm, has developed and taught several new courses for construction management students at the University of Washington, and is the author of numerous textbooks, including Management of Construction Projects, second edition, with John Schaufelberger, and Introduction to Construction Project Engineering, with Giovanni Migliaccio, also published by Routledge. The following documents are available on the eResource for this book: www.routledge.com/ Cost-Accounting-and-Financial-Management-for-Construction-Project-Managers/Holm/p/book/ 9781138550650 This first list is made available to students and instructors: (cid:85)(cid:202) Expanded and alternate versions of some figures utilized within the book: (cid:405) Figure 4.3Alt: Concrete QTO for concrete COP (cid:405) Figure 4.4Alt: Concrete pricing recapitulation sheet for COP (cid:405) Figure 4.4L: Detailed construction estimate (cid:405) Figure 4.5Alt: Summary estimate (cid:405) Figure 5.1L: Detailed construction schedule (cid:405) Figure 5.2L: Detailed jobsite general conditions estimate (cid:405) Figure 6.1L: Detailed home office general conditions estimate (cid:405) Table 10.1Alt: Overhead spread by specialty (cid:405) Table 13.1L: Monthly cost loaded schedule (cid:405) Table 14.3BL: Blank live SOV continuation spreadsheet template (cid:405) Figure 15.1Alt: Concrete change order proposal (cid:405) Figure 19.2Live: Live Excel pro forma (cid:85)(cid:202) Other documents referred to within the book: (cid:405) Case study organization chart, reference Chapter 1 and others (cid:405) AIA A102 contract instructions (cid:405) Sample AIA A102 contract, reference Chapter 3 and others (cid:405) Jobsite layout plan, reference Chapter 11 (cid:405) Expanded table of contents (cid:405) Live Excel estimating forms utilized in Chapter 4 of this text and in Construction Cost Estimating, Process and Practices, Pearson, 2005. The following are also made available to instructors: (cid:85)(cid:202) Instructor’s Manual, complete with answers to all of the review questions and many of the exercises. A select group of case studies from Who Done It? 101 Case Studies in Construction Management (Amazon/Create Space, 2017), which will be published in a new format under the title 101 Case Studies in Construction Management by Routledge in 2019, are also included. (cid:85)(cid:202) In addition to many exercise solutions included in the instructor’s manual, several separate spreadsheet files are also provided, including: Exercises 1.2/3.6, 1.7/3.2, 2.9/10, 10.5, 12.7, 12.9, 13.8/9, 14.2, 15.4, 16.3, 18.2/3, 19.4, and others (cid:85)(cid:202) PowerPoint lecture slides for all 19 chapters, 19 separate files, almost 680 slides in total. Cost Accounting and Financial Management for Construction Project Managers Len Holm ROUTLEDGE TRayoloru & tFlreandcisg Geroup LONDON AND NEW YORK First published 2019 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 711 Third Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2019 Len Holm The right of Len Holm to be identified as author of this work has been asserted by him in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Names: Holm, Len, author. Title: Cost accounting and financial management for construction project managers / Len Holm. Description: Abington, Oxon ; New York, NY : Routledge, 2018. | Includes index. Identifiers: LCCN 2018011969| ISBN 9781138550643 (hardback : alk. paper) | ISBN 9781138550650 (pbk. : alk. paper) | ISBN 9781315147307 (ebook) Subjects: LCSH: Building—Estimates. | Construction projects. | Cost accounting. | Construction industry—Costs. | Project management. Classification: LCC TH435 .H85 2018 | DDC 690.068/1—dc23 LC record available at https://lccn.loc.gov/2018011969 ISBN: 978-1-138-55064-3 (hbk) ISBN: 978-1-138-55065-0 (pbk) ISBN: 978-1-315-14730-7 (ebk) Typeset in Sabon by Keystroke, Neville Lodge, Tettenhall, Wolverhampton Visit the eResource: www.routledge.com/Cost-Accounting-and- Financial-Management-for-Construction-Project-Managers/Holm/p/ book/9781138550650 Contents List of figures xi List of tables xiii Preface xv Abbreviations xvii 1 Introduction 1 Financial management overview 1 Accounting purposes 3 Introduction to the built environment 5 Accounting managers 6 Accounting cycle 6 Organization of the book 8 Case study 8 Review questions 9 Exercises 10 2 Accounting methods 11 Introduction 11 Uniqueness of the construction industry as it relates to accounting 11 Construction firm ownership structures 14 Construction accounting methods 16 Internal accounting controls 18 Summary 19 Review questions 19 Exercises 20 vi Contents 3 Introduction to construction management 21 Introduction 21 Delivery and procurement methods 22 Pricing 26 Construction contracts 27 Project management 29 General contractor organizations 31 Risk analysis 34 Summary 35 Review questions 36 Exercises 36 4 Introduction to estimating 38 Introduction 38 Work breakdown structure 41 Quantity take-off 43 Pricing 45 Estimate summary 49 Summary 51 Review questions 52 Exercises 52 5 Jobsite general conditions 53 Introduction 53 Elements of jobsite general conditions 54 Development of jobsite general conditions estimates 55 Strategies 59 Accounting of jobsite general conditions 61 Impact of change orders, claims, and delays on general conditions 62 Summary 63 Review questions 63 Exercises 63 6 Overhead and profit 65 Introduction 65 Creation of the general conditions estimate 66 Management of the home office general conditions budget 68 Breakeven analysis 70 Profits 72 Summary 77 Review questions 77 Exercises 78 Contents vii 7 Financial statements 80 Introduction 80 Balance sheet 80 Income statement 83 Financial ratios 84 Journal entries 87 Job cost financial reports 87 Summary 90 Review questions 90 Exercises 91 8 Cost control 92 Introduction 92 Cost control cycle and connection with accounting processes 93 Establishment of the cost base, including buyout 94 Foreman work packages 94 Direct labor and material and subcontract cost coding 99 Monthly project management forecasting to the home office 101 Summary 106 Review questions 106 Exercises 107 9 Earned value analysis 109 Introduction 109 Development of the third curve 109 Earned value as a cost control tool 110 Earned value indices 113 Earned value as a pay request tool 115 Summary 115 Review questions 116 Exercises 116 10 Activity-based costing 117 Introduction 117 Foundation 118 Methodology of activity-based costing 120 Home office activity-based costing applications 122 Jobsite activity-based costing applications 126 The future 127 Summary 128 Review questions 129 Exercises 129 viii Contents 11 Lean construction techniques 131 Introduction 131 Lean construction 132 Value engineering 137 Subcontractors and suppliers 139 Supply chain material management 140 Jobsite laydown and material handling 143 Summary 144 Review questions 145 Exercises 145 12 Equipment use and depreciation 147 Introduction 147 Equipment types 148 Equipment ownership 150 Equipment operation 154 Equipment allocation to job cost 155 Maintenance expense allocations 157 Depreciation 157 Summary 162 Review questions 163 Exercises 163 13 Cash flow 165 Introduction 165 Cash flow curve process 166 Jobsite expenditures 172 Jobsite revenue 176 Net cash flow and impacts to home office 177 Methods to improve cash flow 177 Summary 179 Review questions 180 Exercises 180 14 Payment requests 182 Introduction 182 Contract types 183 Schedule of values 183 Payment request process 187 Retention 192 Lien management 193 Summary 195 Review questions 195 Exercises 196 Contents ix 15 Accounting for change orders 198 Introduction 198 Change order proposal process 199 Change order proposal pricing 202 Negotiations and approvals 204 Incorporation into cost control and accounting control systems 205 Unresolved change orders 206 Summary 206 Review questions 207 Exercises 207 16 Financial close-out of the construction project 208 Introduction 208 Construction close-out 209 Project management close-out 211 Financial close-out 212 As-built estimate development and database input 218 Summary 219 Review questions 220 Exercises 220 17 Time value of money 222 Introduction 222 Present value 223 Future value 224 Interest 225 Inflation 228 Other value considerations 229 Summary 230 Review questions 231 Exercises 231 18 Taxes and audits 233 Introduction 233 Income tax: Federal, state, and local 234 Business, property, and sales taxes 238 Labor taxes 239 Audits 242 Summary 244 Review questions 245 Exercises 245