General Contractors

Blueprint to Better Accounting

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Fast Answers

Progress billing refers to the method of issuing invoices to customers based on the completion of a long term contract. As the project is advancing, invoices are issued as the project reaches milestones of performance that can be measured or identified. Often these milestones are documented in an agreement or contract that takes longer than one year to complete.

Direct costs are expenses obtained and consumed for a specific identifiable project. Examples include the asphalt consumed in paving a road; the cost of the paint used to decorate a kitchen wall; the labor charges of a plumber installing bathroom fixtures.

The percentage of completion method of accounting measures the recording of revenue based on the costs incurred to date as a percentage of the projects total cost. This method of accounting ensures that the amount of revenue earned is measured in the same period as costs are incurred. If 20% of a projects costs have been expended, then 20% of the revenue is recognized as income.

Gross profit percentage is a measurement of profitability. The total cost of a sale divided by the sales income generates a percentage or margin. The higher the percentage or margin, the stronger indicator that a profit will be recognized by the contractor.

Companies can be profitable but have poor cash flow when a company has difficulty in collecting money or is required to pay principle on outstanding loan balances.

Labor can be a fixed or variable cost. For example, the accumulated hours of building a structure would be variable based on the total number of hours incurred. However, the costs of a salaried project supervisor would be fixed.

Construction often has a unique revenue recognition model. It utilizes accounting concepts that are in addition to the mechanics of traditional accrual accounting methods of recording revenue and expenses.

Direct Labor, Subcontractors, Material, Equipment Costs, Equipment Rentals, Inventory

General & Admin Salaries, Supplies, Auto & Truck expenses, Insurance, Employee benefits, Rent, Office Expenses, Utilities, Advertising expenses, Training expenses, Dues & Subscriptions

Total Contract Cost$1,000,000
Total Contract$1,500,000
Cost to Date$500,000
% Complete50%

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