11

Business Methods

Con E 221

222

RPQ’s

1. The two major accounting methods are the cash method and the accrual method

A. True B. False

2. A Schedule of Values is used by a AE in the process of certifying payment to a general contractor.

A. True B. False

3. The Income Statement presents a summary of the assets, liabilities, and net worth of a company at a particular point in time.

A. True B. False

333

RPQ #1

1. The two major accounting methods are the Cash method and the Accrual method

A. True B. FalseThe correct answer is A. True

444

RPQ #2

2. A Schedule of Values is used by a AE in the process of certifying payment to a general contractor.

A. True B. FalseThe correct answer is A. True

555

RPQ #3

3.The Income Statement presents a summary of the assets, liabilities, and net worth of a company at a particular point in time.

A. True B. FalseThe correct answer is B. False

666

Financial Records

1. All the following need financial records depicting a companies performance except

a. Bankersb. Government agenciesc. Employeesd. Ownerse. Insurance companies

777

Financial Recordsc. employees

Why are financial records important to bankers,government agencies, owners and insurance companies?

Bankers – loans and credit rating

Government agencies – the law (IRS)

Owners – performance

Insurance Companies – bonding capacity or self- insurance capabilities

888

Accounting Methods Cash Method - Accrual Method

Can anyone tell me the definition of each of these methods of accounting?

Which of these two give the most realistic indication of true profit and loss?

The contractor’s accounting system centers around what main theme?

999

Cash Method vs. Accrual Method

Count income when receive actual payment

Count expenses when actually paid

Simple Does NOT track income vs.

expenses per project Does not give realistic

indication of true profit or loss

BEST FOR SMALL, LABOR ONLY CONTRACTORS (NO MAJOR EQUIPMENT OR MATERIAL COSTS)

Count income when earned, not when paid

Count expenses when incurred, not when paid

Complex Tracks income vs. expenses

per project Gives a more realistic

indication of true profit or loss

BEST FOR CONSTRACTORS DUE TO PROJECT COST ACCOUNTING METHODS

101010

Long-Term Contracts Accounting What is meant by “long-term contract”?

Contract not completed within tax year started Tax Reform Act of 1986 requires that one of

the following long-term accounting methods be used. Percentage of Completion Method

Percentage of Completion – Capitalized Cost Method

Completed Contract Method

Use severely restricted

111111

Financial Statements

What is meant by “accounting period”? usually – one month, quarter (3 mo.), annual

Two financial statements that have particular importance are:

The Income Statement The Balance Sheet

What can you tell me about each of these financial statement?

121212

Income Statement (p. 243)

131313

Income Statement Usually at year end Compares Income vs. Expenses

Other names Profit & Loss Statement Statement of Earnings Income Sheet

141414

Balance Sheet (p. 245)

151515

Balance Sheet

Summary of the: Assets Liabilities Net Worth

Assets = Liabilities + Net WorthNet Worth = Assets – Liabilities

Other names: Financial Statement

161616

Balance Sheet (cont.)

Shows type of assets owned Shows how assets are financed Shows liquidity of firm

Ability to meet short-term financial obligations

171717

Financial Ratios (p. 247-249)

Used to analyze Income Statements & Balance Sheets

Liquidity Ratio (L.R.) If L.R.> 1.0 business is “liquid”

Trend of each ratio is important 2000 L.R. = 1.05 2001 L.R. = 1.01 2002 L.R. = 0.97

Contractor running out of cash!

181818

Construction Equipment Acquisition

Construction Equipment is very expensive Initial Cost Maintenance Repairs Parts

Difference between renting and leasing?

Rent, Lease or Own – What are some considerations?

What is an important principle in equipment management?

Equipment should be a profit center – earn its’ keep

191919

Rent vs. Lease vs. Own

Rent Lease

Own

One-time need, 1 mo.Replace broken down machine for 1 week

√

Need 12 mos. or moreFirst time neededOption to buy available

√

Replacing old equipment previously ownedNeed for multiple projects

√

202020

Equipment Management

Rent – Lease – Buy is a financial decision Preventive Maintenance Program Keep accurate cost records per machine

Income, expenses and usage Equipment replacement decision

parameters Compare income / hr. vs. expenses / hr. New vs. major rebuilding

212121

Equipment Depreciation

Equipment values decrease due to: age, wear, and obsolescence

Depreciation methods systematically reduce the value of a piece of equipment on an annual basis

Straight-Line Depreciation

Equal decrease in value per year

Modified Accelerated Cost Recovery System (MACRS) Depreciation

First year has highest depreciation – amount per year decreases per IRS guidelines

222222

Procurement Activities included:

Purchasing Expediting and Receiving Inspection Shipping Subcontracts

What do we mean by “expediting”?

232323

Cash Discounts Material dealers (lumber yard, concrete

suppliers) offer cash discounts to a contractor as an incentive for early payment of bills.

What does “2/10 net 30” mean?

What does “ROG” and “AOG” mean?

242424

Title of Purchases A variety of losses can and do occur during

transportation, delivery, unloading, and storage of materials.

When losses do occur, who pays for the damage? Depends on who holds “Title” to material

What do the abbreviations “FOB”, “CIF” and “COD” mean?

252525

FOB FOB – “free on board” FOB - seller shall put the goods on board the

common carrier free of expense to the buyer, with freight paid to the FOB point designated

FOB jobsite or FOB storage yard Title goes to the buyer when the carrier

delivers the goods at the place indicated Seller is responsible for damages in

shipment USE THIS!

262626

CIF

CIF – “cost, insurance, freight” Purchase-order price includes the cost of

goods, customary insurance and freight to the buyer’s destination

Title passes when the seller delivers the merchandise to the carrier and forwards to the buyer the bill of lading, insurance policy, and receipt showing payment of freight

PUTS CONTRACTOR AT RISK DURING SHIPMENT

272727

COD

Collect on COD – “collect on deliver” Title passes to the buyer, if he is to pay

the transportation, at the time the goods are received by the carrier

Seller reserves the right to receive payment before surrender of possessions to the buyer

282828

Project Cost Breakdown

What is meant by:

Schedule of Values

Job Burden

Front-End Loading

292929

Schedule of Values

303030

Final Payment What is the normal “Final Payment” process?

Achieves substantial completion of project Preliminary inspection by AE List of deficiencies (punch list) Certificate of Substantial Completion (by AE) Deficiencies remedied Final inspection by AE Certificate of Final Payment (by AE) Request for final payment (by GC)

Waivers of lien Affidavit certifying all payment have been

made Contractor required to provide:

As-built drawing, written warranties, maintenance bonds, and literature

313131

Cash Flow and Cash Forecasts

Cash flow is one of the major causes of failure for small construction companies.

A. True B. False

A cash forecast is reliable up to one year into the future.

A. True B. False

323232

Mechanic’s Lien

A mechanic’s lien is a right, by law, to secure payment for work performed and materials furnish in the improvement of land, if the owner has not made payment.

Public property is not subject to a statutory lien. (municipal mechanic’s lien)

How long does a contractor have to file a lien?

What happens in a foreclosure of a lien?

333333

Marketing

Target type of projects and clients Establish company image

Project Signs Company Brochures Advertising Newsletters Publicity

343434

Marketing

Employees are the company

Your Customerspast, present and future

353535

Substance Abuse Programs

Written policies and rules Condition of employment for all employees

Management Workers

Written by employee benefits consultants Legal compliance with laws and labor

contracts

363636

Substance Abuse

Just DON’TDON’T Do It

373737

Employee Motivation Have a target (vision, mission and goals)

Set by senior management Provide the necessary resources

Training and opportunities Acknowledge and Reward good

performance Awards, bonuses

Don’t allow poor performance Earns respect of the good performers

Bring meaning to the workplace Big picture of how each employee fits in

383838

Jobsite Crime

Major source of financial loss Cost of lost items Work slowed or brought to a halt Insurance rates

Crime prevention must be a part of how a contractor conducts its business.