TCM 453 Exam 1

Why do contractors fail?

-Accounting Issues: inadequate cost tracking systems, improper accounting practices, underinsured -Ineffective Financial Management System: tight cash flow, slow receivables, unsettled claims & change orders -Bank Lines of Credit Constantly Borrowed to Limit: all credit fully secured -Poor Estimating & Job Cost Reporting: revenue & margin decrease, loss of bonding capacity, bid jobs too low

What does a financial manager do?

-Accounting for financial resources -Managing costs and profit -Managing cash flows -Making financial decisions

Why is construction financial management different?

-Process vs. project orientation: construction is project driven. each project is unique and usually wide in variety -Centralized vs decentralized projects: construction is decentralized. -Payment terms: long term contracts, monthly payments, retention -Heavy usage of subcontractors: about 90% of project is done by subs

3 main ledgers for construction cost control systems

-general ledger: tracks financial date for the entire company. used to prepare company financial statements and taxes -job cost ledger:used to track the financial data for each of the construction projects -equipment ledger: used to track financial data for heavy equipment and vehicles

Why is construction financial management important?

-lots of risk -small profit margins -financing for project needed (negative cash flow)

Income Statement

A financial statement showing the revenue and expenses for a fiscal period.

Balance Sheet

A financial statement that reports assets, liabilities, and owner's equity on a specific date. assets= liabilities + owner's equity

Cost Reporting

Accounting system provides management with data AFTER the opportunity has passed to respond to and correct problems. - happens after the fact/too late to fix

Cost Control

Accounting system that provides management with timely costs data to analyze and correct problems in a timely manner. Crucial to PROACTIVE project management. -managing in real time/ helps manage and fix problems

Construction costs

Includes both direct and indirect costs Categories include: (MLES) -Materials -Labor -Subcontract -Equipment -Other

Methods of Accounting

Transactions will be handled differently depending on the accounting method selected by each company: -cash: easiest accounting method, but not great for cost control (Information is too late) -accrual: recognizes payment when invoice is sent (e.g. sent bill to owner) con: paying taxes on money not received -percent completion: recognize revenue and expenses through the course of the project -completed contract: recognize revenue and expenses at completion of project