Construction Accounting and

Financial Management

Chapter 7
Managing Costs

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Material Purchases

 Purchase orders approved by project

manager
 Supervisor has limited authority to approve
small purchase orders

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Materials Purchases

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Materials Purchases

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Labor Costs

 Hard to control
 Tracked by timecards
 Must be processed quickly

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Labor Costs

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Subcontracts

 Often requires progress payments

 Hard to determine percent complete

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
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 Subcontracts

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Subcontracts

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
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 Equipment

 Hard to control
 Controlled like labor
 Use equipment time cards

 Be sure equipment is returned as soon as the

project is done with it

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Other Costs

 Where possible, use purchase orders

 When a purchase order has not been used,
approval by project manager is required
 For example, for utility bills

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 General Overhead Costs

 Must be managed as aggressively as

construction costs

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Job Profitability

 Update weekly
 Cost to complete
 Estimated cost at completion
 Estimated profit

 Include committed costs even if not tracked in

the accounting system

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Cost Loaded Schedule

 Prepare schedule
 Assign cost to the tasks
 Determine the weekly or monthly costs

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Earned Value

 Measures performance with regards to

 Schedule
 Cost

 Ignores items which do not have a cost

 For example, submittals

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Budgeted Cost of Work Scheduled
(BCWS)
 The expected cost of the work that is
scheduled to be performed during a specific
period of time

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Budgeted Cost of Work Performed
(BCWP)
 The expected cost of the work that is actually
performed during a specific period of time

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Actual Cost of Work Performed
(ACWP)
 The actual cost of the work that is performed
during a specific period of time
 Hard to calculate in a timely matter because
of lag in receiving and processing invoices

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Schedule Performance Index (SPI)

 SPI = BCWP/BCWS
 Measures progress of work
 Results
>1 : Ahead of schedule
=1 : On schedule
<1 : Behind schedule

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Cost Performance Index (CPI)

 CPI = BCWP/ACWS
 Measures control of budget
 Results
>1 : Under budget
=1 : On budget
<1 : Over budget

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Labor Cost Performance Index (LCPI)

 Same as CPI except it only looks only at in-

house labor
 LCPI = BCLP/ACWP
 BCLP = budgeted cost of labor performed
 ACLP = actual cost of work performed

 Measures control of in-house labor costs

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Labor Cost Performance Index (LCPI)

 Results
>1 : Under budget
=1 : On budget
<1 : Over budget

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Total Estimate Cost at Completion

 TEC at C = Total Estimate/CPI

 Assumes CPI will not change

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 SPI/CPI Target levels

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
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 Project Closeout Audit

 Validate data
 Find areas where performance was better
than expected
 Learn how to repeat it

 Find areas where performance was worse

than expected
 Learn how to avoid it

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved