Managing the Profitable Construction Business by Thomas C. Schleifer & Kenneth T. Sullivan & John M. Murdough

Author:Thomas C. Schleifer & Kenneth T. Sullivan & John M. Murdough
Language: eng
Format: epub
Publisher: Wiley
Published: 2014-02-14T00:00:00+00:00

9.10 IMPACT OF TOTAL REVENUE

The accuracy of the total revenue figure is critical because of its impact on the financial statements of the enterprise. Total revenue is the first line in the income statement and directly impacts stated profit or loss. Profit or loss for the fiscal year directly affects assets or liabilities on the balance sheet. The information flow within the management structure is shown in Figure 9.5.

Figure 9.5 The Information Flow within the Management Structure

In Figure 9.5 it can be seen that the percent completion of a project is seen most clearly in the field, but a project manager, who is in the office, usually prepares the estimate of the cost to complete. The accounting department then uses costs incurred (and recorded) and the estimate of the cost to complete to calculate the percentage completion of the project rather than field personnel doing it. The accounting department uses this calculation to determine total sales and adjusts or justifies any disparity between the stage of completion of the project and the percent billed on the project.

Because of the effect on cash flow, a prudent businessperson would be expected to avoid underbilling at all times. However, the “cost in excess of billings” entry appears in virtually all U.S. construction company financial statements. The entry suggests that costs have been incurred that have not been billed for. They will be billed for in the future. With the obvious advantage of billing for all work performed in a timely manner and the cash flow pressures of financing the work, it is unlikely that the industry is in a net underbilled condition. Underbilling implies that the people billing the work are not communicating with those building the work or that the estimate of the cost to complete the work is optimistic or in error. The amount billed on a project is not taken into consideration in the preparation of the estimate of the cost to complete the work on the project.

It is apparent from the preceding examples that the percentage of completion method used in construction has the potential for errors, can lead to a false sense of security, and needs to very carefully managed.

… the percentage of completion method used in construction has … serious … potential for errors …

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.