1. The Chart of Accounts and the Schedule of Values are essentially the same thing?
a. true b. false
2. Providing proper storage and care, scheduling deliveries and ensuring accurate contracts are part of which superintendent responsibility?
a. variance analysis b. labor cost control
c. VPO
d. Material control
3. The purpose of OVE is to:
a. evaluate the least costly method without sacrificing quality or function b. gather information
c. ensure accurate contracts d. method of handling deliveries
4. The significance of the committed costs section of the job cost accounting model is that it:
a. provides excellent budget variance data b. is not significant
c. identifies projected costs to finish and potential budget problems d. it is a DC
5. If a budget line item code 4200 had an SOV of $50,000, a SC of $40,000, a ETF of
$5,000, a PCO of $1,000 and the SC had been paid 25% project-to-date, what is the ET and the DS?
a. $40,000 and $30,000 b. $50,000 and $10,000 c. $46,000 and $10,000 d. $45,000 and $25,000 (answers: 1-a, 2-d, 3-a, 4-c, 5-c)
Lesson 7 Quiz:
See Blackboard, Assignments, Quizzes.
Lesson 8: Commercial Cost Controls Introduction:
Never, never forget the main purpose of being in business is to make a profit. (Notice that I did not say the only reason but profit is the main reason.) Commercial job cost accounting is very similar to residential job cost accounting. In fact I use the exact same system for both. In this lesson you will learn how to plan and project profits and how they are part of the business plan of the company. You will learn how to calculate how much profit you must bill for every month in order to meet the company’s expectations. You will study several spreadsheets that will help you understand how progress payments are planned and how profits are realized. You will also study how to create and read a job cost general ledger and how to use the ledger in the job cost model to provide you with critical financial information for better management.
Lesson Objectives:
At the end of this lesson you should:
1. Learn how profit and overhead can be loaded into an SOV budget.
2. Learn how detailed SOV budgets need to be for the best job cost management.
3. Learn what is typically part of overhead and profit.
4. Be able to describe when unit price contracts are used.
5. Be able to create and explain a project cash flow projection worksheet.
6. Understand the value of collecting historical labor data.
7. Be able to calculate monthly profit and overhead billings to meet company demands.
8. Be able to read and interpret a job cost general ledger and transfer the information to the job cost model to review project financial performance and identify any problem areas.
How to Proceed:
(7) Read and review the discussion materials.
(2) Read and review Construction Jobsite Management, Chapter 14, pg. 349-368, Chapter 11, 293-297.
(17)Answer the self-check questions to evaluate your readiness to take quiz 8.
(18)When you feel that you are ready, Take quiz 8.
Discussion Materials:
Concept 1: Managing the Bottom Line - Profit
It is important to remember that through the entire job costing process that there is a great
underlining expectation to be profitable and make money every month. The home office needs to make money to pay its overhead and the project needs to pay for its overhead including
mobilization and general conditions. The company always has plans for how much it needs to bring in for these overhead costs. Consider the following small company, the ABC Construction Company. Two brothers are partners in the company. They are commercial general contractors.
They have four other employees. All other workers are sub contractors. Their home office monthly costs look like this:
What Monthly Amount Description
John- owner/estimator $6750 $60,000 annual salary plus
35% benefits James – owner/project
management
$6750 $60,000 annual salary plus
35% benefits Jane-Secretary/office
manager
$4500 $40,000 annual salary plus
35% benefits
Henry-Project Manager $5625 $50,000 annual salary plus
35% benefits
You-Project Manager $5625 $50,000 annual salary plus 35% benefits
David-Superintendent $4950 $44,000 annual salary plus
35% benefits
Office/warehouse $4166 Lease payment, 15,000 SF
Office supplies $2000 Paper, copier etc.
Telephone/fax/mobile $3000 Communication costs
Trucks/equipment $2000 Company owned
Misc/Insurance etc. $2000
Total $47,366
They are committed to $47, 366 per month regardless or not if they bring any money in. Their pro forma (profit plan) for the year looks like this:
Strategic Plan: $10 million in business this year
10% profit margin average on all work completed. This would be $1,000,000 annually to cover monthly overhead expenses ($83,333 per month)
If they can accomplish this goal they would make an additional $35,967 per month that would go to owner profit and maybe employee bonuses. If these number held true then total home office costs would be $568,392 less total profit income of $1,000,000 so the additional profit of $431,609 could be earned. (It should be mentioned that the $47,366 or
$568,392 annualized would be the breakeven point.) Tactical Plan: So, how do we get there?
The goal on a monthly basis is to earn $83,333 per month. It is determined that this amount must come from each project manager. There are three project managers so it is divided evenly with each responsible for 1/3. So 1/3 or .33% of $83,333 is $27,499 per month. Since you are a project manager you must bring home to the company $27,499. This also means that if your average project has a 10% profit margin in it then every month you must complete and bill for $274,998. This may come from one project or from several
projects. Profit does not flow so evenly. At the minimum, how much must you bill for every month to just break even?
(If $47,366 is the home office break even amount, times by .33 for your share =
$15,630 would be your amount. If you can maintain a 10% margin then you must bill $156,307 per month.)
So what does all this mean when it comes to scheduling and studying your schedule of values?
You have go to find a way to get the work done and bill for the work done so that your company strategic goals can be met. If those goals are not met you had better believe that one of the brothers would want to find out why.
Concept 2: Planning Your Project Profitability
Let’s suppose that you are assigned a project that has already been going for a month. You show up to the job trailer and find that the SOV has been set but no one else has any idea as to where the project is financially. All that there is is a big pile of contracts, purchase orders, and labor time records in an in-basket. So let’s begin. You find the following:
Job Name: Subway Sandwiches – Lexington, General AIA 101 Lump Sum Contract for
$421,601. (We often call this the prime contract or PC.) Job Number: 005-2XXX
Start date: 2/02/2XXX (notice to proceed date) Project Schedule: 120 calendar days (4 months) SOV: Project Totals $421,601
1 12000
2 18000
3 23000
4 15700
5 6000
6 58000
7 16000
8 24000
9 43200
10 13300
11 34900
12 34000
13 8000
14 3500
15 67000
16 45000
Desired Profit Margin: 10%, or $42,601, cost loaded evenly in every Division.
Billing Schedule: You expect to complete each division 25% each month for 4 months. (To keep this example simple we are doing equal percentage billing each month for each division. This will not usually be the case.)
An example is that Division 1; General Requirements has a SOV of $12,000. You will bill 25%
($3,000) of $12,000 every month for 4 months.
Profit Loading: The profit is evenly distributed among the 16 Divisions. This means that
Division 1, $12,000, that 10% of that amount is a profit of $1,200. The profit will be realized by billing the job 4 times at the end of each of the 4 months, thus the 25%. So, month 1, $1,200 x .25 = $300, month 2, $1,200 x.25=$300, month 3, $1,200 x.25=$300, month 4, $1,200
x.25=$300. Thus the total profit for the four months from Division 1 is $1,200.
Are you lost yet? To better help you understand I have gone ahead and put this all together in a spreadsheet.
See file Lesson 8 Subway Project Projections and Job Cost Model.xls You would prepare such an analysis to help you prepare to control the project.
After you have looked at the Subway file you will notice the following information:
1. Your monthly billing should be $105,400, thus your monthly profit billing (10%) will be
$10,540. This will go against your monthly quota as we discussed in concept one.
2. The Profit Projection Schedule clearly identifies every line item (Division) so that you can determine if you are on schedule to meet your profit goals.
Remember the saying, “When we deal in generalities we generally fail but when we deal in specifics we usually succeed.” This allows us to understand, manage and communicate profit projections for every project.
Concept 3: The Job Cost General Ledger and Job Cost Model
Remember our Job Cost Model from Lesson 7? We are going to take things just a step further.
The General Ledger is simply a chronological record of costs that are being charged to the SOV (schedule of values account numbers). Remember that monies can be spent on a project four different ways; SC-sub contract, PO-purchase order, L-labor and O-other. Let’s go back to that big pile of contracts, purchase orders, and labor time records in an in-basket. You must now perform a transaction analysis to determine where you are with the budget for this first month that you have missed.
Almost think of this as a game. You start going through the pile and entering them into the General Ledger. Here is how it looks:
Date Debit
Type
CSI Code Company Code Amount
2-2-2XXX PC Prime 05-2XXX-PC1 $421,601
2-3-2XXX PO 1 05-2XXX-PO1-1 $600
2-3-2XXX PO 1 05-2XXX-PO2-1 $545
2-6-2XXX SC 2 05-2XXX-SC1-2 $16,000
2-8-2XXX SC 3 05-2XXX-SC2-3 $22,000
2-9-2XXX SC 4 05-2XXX-SC3-4 $14,700
2-10-2XXX SC 6 05-2XXX-SC4-6 $55,000
2-11-2XXX PO 6 05-2XXX-PO3-6 $4,500
2-12-2XXX PCO 6 05-2XXX-PCO1-6 $1,300
We won’t show the entire month, but what is this telling us. (By the way the 2XXX means any year in 2000-2999 so this will not be time-dated material). Notice we have a signed prime contract (PC). It is also marked 1 for number one. We have three purchase orders labeled 1-3 so they don’t get mixed up. The PO’s go against division 1 and 6. Four sub contracts have been signed in site work, concrete, masonry and woods (framing). So it looks like the initial sub contractors are off and going. You will be starting to keep a log of all PC, PO, SC and PCO and others so that you can find them quickly and track them judiciously. (When we get into the software, you will learn how Prolog which means, you guessed it, professional logging of documents, does this automatically).
Here is what the Job Cost Model would look like:
See file Lesson 8 Subway Project Projections and Job Cost Model.xls
From the 9 entries in the job general ledger that are placed in the Job Cost Model we begin to learn some interesting things. Divisions 1-4 are in good shape but we have a bust in 6, framing.
With one PO for $4,500and a PCO estimated at $1,300 we are already committed to a negative
$2,800. We can go discover why and see what we can do about it.
This example begins to show you how to use the General Ledger and the Job Cost Model with a simple spreadsheet. Hopefully these concepts will help you better understand how to effectively track and control any project budget.