Construction Business Management


Cost Accounting and Financial Statements

Cost accounting is the systematic assignment of the cost of labor, materials, and overhead associated with the various elements of job cost to a set of convenient codes for accounting purposes. The use of cost codes is meant to enable management to monitor and review costs associated with any part of a project, e.g., the cost of the reinforcing steel in a floor slab.

Cost coding is used to follow the progress of a project, and to compare each line item in a cost budget to final actual cost. Field cost codes should duplicate the codes on the cost estimate.

Continuous review of job cost reports is a critical project management function throughout the course of a construction project. A problem line item can be flagged while there may be time to make corrections.

Historical cost coding is valuable for bidding, especially in the case of repetitive projects such as are common in the construction of chain stores that use the same or similar design for multiple locations. It also serves as a benchmark against which the outcome of future projects may be measured.

The success of a firm's cost coding system is dependent on the following:

  • The design of the coding system itself
  • The balance between coding too much and too little detail
  • The diligence and accuracy of each employee responsible for assigning codes to job costs
  • Capable accounting software
  • Timeliness of data input
  • Analysis and effective use of the resulting reports

Cost accounting is not a separate set of books, but merely a categorization of data.

Financial Statements

A company's set of "financial statements" is simply the various pertinent reports derived from the company's books of account. Together these financial statements, if truly representative, present a complete picture of the company's finances from which an accurate opinion of the company's overall performance and financial position may be determined.

A formal set of financial statements shows a company's profit or loss and other financial barometers during a month, quarter, or the firm's fiscal year, and its resulting financial position as of the last day of that period. You will use your financial statements to review and make adjustments in response to past performance, and to project future workload capacity, borrowing and bonding needs, and staffing levels. They're required by outsiders like your bank, bonding company (always), materials suppliers, insurance companies, other vendors, and the owners you do business with.

The components of your financial statements that you're likely to become most familiar with are your income statement and your balance sheet. These will be discussed in a future article.

The author of this article, Nick Ganaway, was a successful general contractor for 25 years. He is a consultant in Atlanta, Georgia, for contractors and other small business owners. Nick has described how to set up and manage a construction business that is profitable, enjoyable, and enduring in his book, Construction Business Management: What Every Construction Contractor, Builder & Subcontractor Needs to Know.


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