Construction Project Job Costing

Construction Project Job Costing

 

LUTZ BUSINESS INSIGHTS

 

CONSTRUCTION PROJECT JOB COSTING

construction project job costing

will lanik, Audit Manager

 

In construction, accurate estimates can make the difference between an average year and a great year. To dial in accurate estimates, historical and real-time figures must be readily available to project management. Project management can include an estimator, project manager, superintendent, and owner, depending on the structure of your business. It is essential that all areas of project management are actively communicating and working together throughout the construction project.

JOB COSTING

Job costing is the process of tracking expenses related to a construction project and provides management information related to the costs incurred at a specific point in time. When it comes to construction projects, there are both direct and indirect costs that need to be tracked.

Direct costs

Direct costs are expenses directly applicable to the construction project. They are specific and straightforward. These often include labor, cost of materials, and subcontractor expenses.

Indirect costs

Alternatively, indirect costs are not specifically allocable to the construction project. These costs include overhead, equipment and tools, and labor burden. Overhead can include items such as support staff, trailers, supplies, insurance, and other miscellaneous costs. Equipment includes depreciation, repairs, maintenance, taxes, and insurance. Labor burden includes FICA taxes, workers compensation insurance, federal and state unemployment, vacation, and other fringe benefits.

Most contractors and construction companies aim to obtain and review detailed job costing information regularly to identify trends and opportunities. To get the most out of your reports, here are some helpful tips to think about:

  • Review cost codes to streamline data and eliminate repetition. Use account numbers that tell a story.
  • Implementation of paperless processing for payroll, payables, and billings can create efficiencies during a tight labor market.
  • Improve reports, so they blatantly communicate inefficiencies.
  • Export job cost information in a consistent manner that does not need to be modified prior to analysis.
  • Think about automating recurring reports that run regularly out of your accounting software using Microsoft Power BI or other data analytic tools.

Benefits of Improved Job Cost Tracking

1. Enhanced estimates

Accurate job costing gives your project management team detailed information about expenses, making them more accurate in predicting future project costs. Once you understand what it takes to complete a project, future estimates will be improved.  Getting the facts right in terms of expenses and job costing is a major tool for the success of your construction project.

2. Team management

Timely and specific job cost reports allow project managers and superintendents to adjust performance and implement changes on-site in real-time with the project team. They also allow for labor to be deployed more efficiently during these constraining times. 

3. Tracking job progress

A good job costing report allows you to keep track of your construction project expenses, which is the main component of percentage of completion revenue recognition. This means that timely job costing helps assist with timely and accurate billings, which aids with company cash flow.

4. Profitability

Improving your company’s estimates, team management, and job cost tracking will enhance the lives of your employees and help drive profitability. When your business is able to track outputs against inputs, you are able to dial in opportunity costs and focus on work that truly aligns with internal goals.

For more information on our construction accounting services, technology, or data analytics, please contact us today.

ABOUT THE AUTHOR

402.827.2080

wlanik@lutz.us

LINKEDIN

WILL LANIK + AUDIT MANAGER

Will Lanik is an Audit Manager at Lutz with over five years of experience in accounting. He is responsible for providing accounting, auditing, and consulting services to privately held companies in the construction, manufacturing, and employee benefit plan industries.

AREAS OF FOCUS
  • Audit
  • Assurance
  • Consulting
  • Employee Benefit Plans
  • Privately-Held Companies
  • Construction Industry
  • Manufacturing Industry
AFFILIATIONS AND CREDENTIALS
  • American Institute of Certified Public Accountants, Member
  • Nebraska Society of Certified Public Accountants, Member
  • Certified Public Accountant
  • Accredited in Business Valuation
EDUCATIONAL BACKGROUND
  • MBA, Creighton University, Omaha, NE
  • BSBA in Finance and Accounting, University of Nebraska, Lincoln, NE

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Book vs. Tax Depreciation Methods in the Construction Industry

Book vs. Tax Depreciation Methods in the Construction Industry

 

LUTZ BUSINESS INSIGHTS

 

Tax Methods in Construction Industry

Book vs. depreciation methods in the construction industry

CLARKE BELLEr, AUDIT DIRECTOR

 

Plant, Property and Equipment (PP&E) is a vital component to most construction contractors’ operations, specifically for heavy equipment contractors and subcontractors. Outside of human capital, it is often the most important resource for contractors to complete their work on hand and compete for future work. PP&E also makes up a large portion of many contractors’ balance sheets and is subject to management estimates in the form of depreciation methods and useful lives. As these vary from contractor to contractor and often have a large impact on a bonding company’s view of your overall financial position (bonding capacity), it is important to understand the key book/tax depreciation differences and their implications on a company’s financial statements.

 

Book Methods

Book depreciation methods are set based on management’s estimate of the PP&E’s useful life and residual value. This estimate can be derived from historical experience with similar classes of assets or using published equipment guides and is typically documented in a capitalization policy. Generally Accepted Accounting Principals (GAAP) allow for straight-line and accelerated depreciation methods for book purposes; however, depreciation will occur over the asset’s useful life. GAAP also allows management to estimate the residual value of an asset at the end of its useful life. The residual value represents the scrap/salvage value that assets have at the end of their useful life.

 

Tax Methods

Contrary to book methods, tax methods are set by Congress and are subject to changes in tax legislation. Current tax law is very favorable and allows for a company to immediately expense qualifying PP&E in the year of acquisition through bonus or section 179 depreciation.

Bonus depreciation is not limited at the taxpayer level and allows for 100% of an asset’s cost to be taken as an expense in the year of acquisition. Bonus depreciation begins to phase out after the 2022 tax year with a full phase-out of 20% each tax year through 2027.

Section 179 depreciation is limited at the taxpayer level and allows for 100% of an asset’s cost to be taken as an expense in the year of acquisition. While no scheduled phase-out is anticipated, section 179 depreciation is limited on an annual basis at the individual and entity level.

 

Financial Statement Implications

Many pitfalls exist related to depreciation, with certain examples provided below:

  • Utilizing tax methods for internal financial statement purposes – Will result in understated profitability and equity.
  • Omitting residual value from large PP&E – Will result in understated equity and large gains on disposal.
  • Failing to record depreciation and disposals on a regular basis – Will result in significant swings in profitability throughout the year.

Overall, it is important to understand the needs of the users of the financial statements and work with your Lutz representative to ensure that these needs are met. Properly evaluating your PP&E strategy can help mitigate tax, bonding, and banking issues and ensure the business has the appropriate level of PP&E on hand while not creating unintended consequences.

If you have any questions or would like more information on this topic, please contact us today. You can also learn more about our construction accounting services here.

ABOUT THE AUTHOR

402.778.7964

cbeller@lutz.us

CLARKE BELLER + AUDIT DIRECTOR

Clarke Beller is an Audit Director at Lutz with over 11 years of experience. He specializes in providing auditing and consulting services to privately held companies and employee benefit plans with a focus on the construction industry.

AFFILIATIONS AND CREDENTIALS
  • Nebraska Society of Certified Public Accountants, Member
  • American Institute of Certified Public Accountants, Member
  • Certified Public Accountant
EDUCATIONAL BACKGROUND
  • BSBA in Accounting, University of Nebraska, Lincoln, NE
  • MBA, University of Nebraska, Omaha, NE

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5.18.22 | QuickBooks Desktop Demo for the Construction Industry | Webinar

5.18.22 | QuickBooks Desktop Demo for the Construction Industry | Webinar

 

LUTZ BUSINESS INSIGHTS

 

QuickBooks Demo Construction

QuickBooks desktop demo for the construction industry

5.18.22 | 11:30AM – 12:30PM | Webinar

How can contractors in the construction industry track their direct job costs and revenue in an efficient manner? The answer is simple – by utilizing job profitability reports in QuickBooks Desktop. In this webinar, Lutz experts will show you how these reports can help your company manage costs, identify underbillings, and track your job profitability in a summarized format that can be easily added to the WIP schedule on-demand.

Key Takeaways:

  • Job Profitability Report Overview
  • Tips to Customize Reports by Job Status
  • Understand & Fix Common Errors in Reports

Seminar Level: GENERAL ACCOUNTING KNOWLEDGE AND UP

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Tax Methods of Accounting for Construction Contractors

Tax Methods of Accounting for Construction Contractors

 

LUTZ BUSINESS INSIGHTS

 

Tax Methods of Accounting for Construction Contractors

ZACH WEIS, TAX MANAGER

 

Many contractors sign contracts with customers that commence in one year but are completed the following. These are known as long-term contracts. If long-term contracts include the construction of property, Internal Revenue Code (IRC) Section 460 requires the use of the percentage of completion method (PCM) to calculate taxable income. However, there are exceptions for certain contracts that do not require PCM. In this article, we will discuss the requirements of PCM, the exceptions and the advantages and disadvantages of available methods.

 

Percentage of Completion

Revenue Recognition

1. Revenue is recognized based on comparing incurred costs with estimated total costs. The percentage of costs incurred compared with total estimated costs is multiplied by the contract price for revenue recognition. Direct and indirect costs allocated to the job are recognized as incurred.

2. There is an election available to exclude the first 10% of contract revenue and costs.

Advantages

1. Income is recognized over the life of the contract eliminating fluctuations of income.

2. Contract losses can be recognized immediately.

Disadvantages

1. Revenue is taxed before the job is completed.

2. Cash needed for income taxes could be used to fund other projects.

 

Percentage of Completion Exceptions

Internal Revenue Code (IRC) Section 460 provides two exceptions for contractors who are not required to use PCM for tax purposes. If contractors meet ONE of these exceptions, their contracts are exempt from PCM.

  • Home construction contractors,
    • Any construction contract where 80% of the costs are attributable to dwelling units, or
  • Eligible Small Contactor
    • Prior 3-year average gross receipts are under $26 million, AND
    • Estimated contract will be completed within two years.

    Methods Available for Contracts Exempt from PCM

    Taxpayers may choose any method available for contracts not subject to PCM. However, the method applied to the first exempt contract must be applied to all exempt contracts. Determining which method is most advantageous requires professional expertise.

    1. Completed Contract Method

    Revenue Recognition

    • Revenue is recognized once the contract is completed. Direct and indirect expenses allocated to the job are deferred until the job is completed.
    • Contracts are considered complete when 95% of estimated total costs are incurred.

    Advantages

    • Tax deferment of income.
    • Additional cash on hand for new projects instead of paying income taxes.

    Disadvantages

    • Losses are not recognized until the job is complete.
    • Significant fluctuations of income.

    2. Cash Method

    Revenue Recognition

    • Revenue is recognized once cash is collected. Direct and indirect expenses allocated to the job are expensed as paid.

    Advantages

    • Taxable income follows cash flows.
    • Simplified tax planning opportunities.

    Disadvantages

    • Profitability can be misleading.
    • Advance payments from customers considered income.

    3. Accrual Method

    Revenue Recognition

    • Revenue is recognized once revenue is earned. Generally, this follows when bills are issued. Direct and indirect expenses allocated to the job are expensed as incurred.

    Advantages

    • Represents economic reality.
    • Flexibility in revenue recognition.

    Disadvantages

    • Taxable income doesn’t match cash flows.
    • Complexity of revenue and cost recognition.

    Alternative Minimum Tax (AMT)

    Exempt contracts that are not reported under PCM are subject to AMT adjustments. Under AMT, taxpayers are required to recognize revenue for PCM. The difference between the exempt method used and PCM is added or subtracted for AMT. Home construction contractors are NOT subject to this AMT adjustment.

    Please consult with your Lutz Representative or contact us if you have any questions. You can also learn more about our construction accounting services or read related topics by visiting our blog

    ABOUT THE AUTHOR

    402.514.0003

    zweis@lutz.us

    LINKEDIN

    ZACH WEIS + TAX MANAGER

    Zach Weis is a Tax Manager at Lutz with over five years of experience in taxation. He is responsible for providing tax consulting and compliance services to businesses and individuals with a focus on the real estate and construction industries.

    AREAS OF FOCUS
    • Tax
    • Accounting & Consulting
    • Construction Industry
    • Real Estate Industry
    AFFILIATIONS AND CREDENTIALS
    • Certified Public Accountant
    EDUCATIONAL BACKGROUND
    • MPA, University of Nebraska, Lincoln, NE
    • BSBA in Accounting, University of Nebraska, Lincoln, NE

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    2020 + A YEAR OF CHANGE AND UNCERTAINTY FOR CONTRACTORS

    2020 + A YEAR OF CHANGE AND UNCERTAINTY FOR CONTRACTORS

     

    LUTZ BUSINESS INSIGHTS

     

    2020 + A YEAR OF CHANGE AND UNCERTAINTY FOR CONTRACTORS

    2020 +  year of change and uncertainty for contractors

    jonathan patent, tax director

     

    For many obvious reasons, 2020 has been one for the history books. The current, ongoing, and future impact of the year’s events are at the forefront of everyday conversation, from the global pandemic, social justice, or the presidential election. The same goes for the world of taxation. The combination of recently passed and speculative future legislation has made tax planning more important than ever for businesses and individuals in the construction industry.

     

    COVID-19 RELIEF

    With the passing of various relief bills in response to the COVID-19 global pandemic came several tax law changes, both temporary and permanent. We will address some of the most substantial updates, primarily focusing on changes relating to income taxation. However, the importance of the changes to payroll and employment taxes should not be understated.

    CARES ACT

    Paycheck Protection Program (PPP)

    PPP is a program administered by the Small Business Administration (SBA) designed to make capital available for payroll and other vital business expenditures. If funds were used for qualified purposes, forgiveness of the debt is available. The primary goal was to keep individuals employed by businesses in a time when shrinking revenues were to be expected.

    When it comes to income tax implications, this has been a large area of uncertainty and discomfort. When originally presented, the PPP indicated that the receipt of funds and forgiveness of the debt would be excluded from gross income. Subsequently, the IRS issued a publication indicating that the expenses paid for with the funds received from the PPP would be nondeductible on income tax returns. Recently, the IRS issued Revenue Ruling 2020-27, which essentially confirms the nondeductible treatment and states the adjustment should be reported on the tax return for the year in which a “reasonable expectation of forgiveness” is reached.

    Qualified Improvement Property Correction

    The Tax Cuts and Jobs Act of 2017, in an attempt to simplify tax depreciation rules, unintentionally omitted language needed to apply a 15-year depreciable life to Qualified Improvement Property (QIP). It was long expected that Congress would eventually issue a Technical Correction to fix the problem, and that correction was built into the CARES Act and was retroactively applied back to 2018. QIP type assets, such as tenant improvements, are now depreciable over a 15-year life and eligible for bonus depreciation.

    Net Operating Losses/Sec. 461(l) Loss Limitations

    In an effort to help taxpayers monetize current and prior year taxable losses, Congress delayed the effective date for Sec. 461(l) loss limitations to 2021 and retroactively eliminated for 2018 and 2019. This may mean that amended returns for 2018 may be required to free up losses that may have been previously limited. In addition, net operating losses for 2018, 2019, and 2020 may be carried back for up to five years, resulting in potential cash refunds.

    Sec. 163(j) Interest Expense Limitation

    Previously, a taxpayer had been able to deduct business interest expenses up to 30% of adjusted taxable income. The CARES Act changed that threshold to 50% for 2019 and 2020. However, some complications exist in how that is treated depending on the taxpayer’s entity structure (i.e., partnership vs. S-Corporation).

     

    CHANGE IN THE OVAL OFFICE

    It appears that Joe Biden will be the next President of the United States. With that, the President-elect’s tax plan becomes something to pay great attention to as it departs significantly from the revisions enacted by President Donald Trump. Among the substantial changes, we could see the following come our way:

    • The top individual federal income tax rate will be returned to 39.6% from the current 37%.
    • Capital gains and qualified dividends to be taxed at ordinary rates for individuals with income in excess of $1 million.
    • The corporate federal income tax rate would be increased from the current flat 21% to 28%. Also, a potential 15% minimum tax could be applied to corporate book income. This would come into play if income reported for financial reporting and income tax have significant differences. The most obvious culprit, especially, but not only for the construction industry, is accelerated depreciation expense.
    • Additional Social Security taxes could be applied to wages earned in excess of $400,000.
    • Estate tax lifetime exemption could be reduced by approximately 50%, leading to higher taxes paid by decedents estates.
    • Step-up in basis for appreciated inherited assets to be repealed. That means, if an heir inherits an asset that has seen its value increase in the hands of the decedent, the deferred tax would transfer to the heir.

    Although none of the above-mentioned potential changes apply exclusively to the construction industry, they could nonetheless have a significant impact on the amount of tax paid by businesses and individuals. It far too soon to know when exactly these changes could potentially go into effect, but consideration of the timing of taxable income and estate planning needs to be near the top of the year-end checklist.

     

    TRIED AND TRUE STRATEGIES

    BONUS DEPRECIATION

    The 100% bonus depreciation on the purchase of eligible new and used assets is still currently set to be in place through the tax year 2022. Any equipment placed in service prior to the end of the year could be deducted entirely on the corresponding year’s tax return.

    ACCOUNTING METHODS

    If a business has average gross receipts over the three preceding tax years of $25 million or less (indexed for inflation), there may be flexibility on the method of accounting used to report taxable income. Among the possibly preferential methods available are the overall cash basis method, and the completed contract methods for long-term contracts. If certain circumstances exist, these methods may lead to greater deferral of income. However, whether that is a benefit or not needs to be determined on a per taxpayer basis. If gross receipts levels exceed the $25 million threshold, there is less flexibility, but options still exist. Different forms of the percentage of completion method may make sense for certain taxpayers if there is a heavy concentration in certain types of projects or retainage is an overwhelming portion of the contract amount.

    As you can see, tax planning in 2020 will be vital to ensure a tax-efficient future. Each individual’s situation is unique and needs specific attention. Please contact us for more information on how we can assist in making the rules work in your favor.

    ABOUT THE AUTHOR

    531.500.2010

    jpatent@lutz.us

    LINKEDIN

    115 CANOPY STREET

    SUITE 200

    LINCOLN, NE 68508

    JONATHAN PATENT + TAX DIRECTOR

    Jonathan Patent is a Tax Director at Lutz with over seven years of experience in taxation. He provides tax compliance and consulting services to clients with a focus on the construction and real-estate industries. In addition, Jonathan provides tax research and multi-state tax compliance services.

    AREAS OF FOCUS
    • Tax Consulting & Compliance
    • Construction Industry
    • Real-Estate Industry
    AFFILIATIONS AND CREDENTIALS
    • American Institute of Certified Public Accountants, Member
    • Nebraska Society of Certified Public Accountants, Member
    • Certified Public Accountant
    EDUCATIONAL BACKGROUND
    • BSBA in Accounting, University of Nebraska, Omaha, NE

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    WIP Schedule 101

    WIP Schedule 101

     

    LUTZ BUSINESS INSIGHTS

     

    WIP Schedule 101

    wip schedule 101

    will lanik, audit manager

     

    All businesses need accurate financial data to help understand how it is performing and, more importantly, to assist in planning for the future. The construction industry is no different, and one of the most important inputs to financial data is the work in progress (WIP) schedule. Completing a monthly WIP schedule can greatly improve your Company’s ability to monitor job and financial performance.

    The WIP schedule has four major inputs that need to be updated as jobs are acquired and completed.

    1. Current Contract Price

    • This should include the original contract amount plus or minus all expected and agreed upon change orders.
    • Project managers and accounting need to be on the same page as change orders are issued.

    2. Estimated Cost of Construction

    • The estimated costs should continually get updated by the project manager and/or accounting department as change orders are issued, and the job progresses. It is not uncommon for estimated costs to remain unchanged throughout the job, which can impact revenue recognition.

    3. Cost of Construction

    • Total expenses incurred on the job under contract. This typically includes labor, subcontractors, materials, and applied overhead. Overhead can be the hardest to allocate and tracking it often dependent on the type of work your company performs. It is important to understand what drives your applied overhead and make sure its allocation is representative of your costs.

    4. Progress Billings

    • This involves the total amount billed to date on the job. It is important that the billing is occurring accurately and regularly within the job guidelines.

    Once the four inputs above are updated, it is essential to evaluate and scrutinize your WIP schedule before using it to make decisions for the future.

    1. Percent Complete

    • Is the percent complete on each job representative on the actual work accomplished?
    • Are jobs progressing along with owner expectations and completion timeline?

    2. Margin Review

    • Are your margins staying consistent or fluctuating from the bidding phased through job completion?
    • Are you picking up additional margin (gain) or losing margin (fade) as your jobs advance?
      • Look at the margin on your complete job schedule vs. WIP schedule.
    • Is your margin large enough to cover the company’s fixed general and administrative expenses?
    • Are you on pace to have enough top-line revenue to cover fixed costs?
    • If you are not capturing applicable overhead costs, are your margins representative of actual job profitability, or is this getting accounted for in your internal estimates?
    • Are you pricing/bidding jobs accurately?

    3. Billing review

    • It is hard to bill when invoices are not getting approved and remitted timely. Make sure you have a company policy on getting costs input in the correct month.
    • Overbilled (billings in excess of costs and estimated earning) amounts show up on your balance sheet as a liability and can impact bonding, but they improve cash flow management.
    • Underbilled (costs and estimated earnings in excess of billings) amounts show up as an asset on the balance sheet but can hinder cash flow management if not tightly monitored.

    If the current WIP schedule represents the current jobs under contract and progress to date, proceed by adjusting your general ledger revenue, costs, and over/under billings to match the job schedule. It is important to do this at least monthly after internal review to avoid surprises at year-end. If you have any questions regarding the WIP schedule, contact us.

    ABOUT THE AUTHOR

    402.827.2080

    wlanik@lutz.us

    LINKEDIN

    WILL LANIK + AUDIT MANAGER

    Will Lanik is an Audit Manager at Lutz with over five years of experience in accounting. He is responsible for providing accounting, auditing, and consulting services to privately held companies in the construction, manufacturing, and employee benefit plan industries.

    AREAS OF FOCUS
    • Audit
    • Assurance
    • Consulting
    • Employee Benefit Plans
    • Privately-Held Companies
    • Construction Industry
    • Manufacturing Industry
    AFFILIATIONS AND CREDENTIALS
    • American Institute of Certified Public Accountants, Member
    • Nebraska Society of Certified Public Accountants, Member
    • Certified Public Accountant
    • Accredited in Business Valuation
    EDUCATIONAL BACKGROUND
    • MBA, Creighton University, Omaha, NE
    • BSBA in Finance and Accounting, University of Nebraska, Lincoln, NE

    SIGN UP FOR OUR NEWSLETTERS!

    We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

    About UsOur Team | Events | Careers | Locations

    Toll-Free: 866.577.0780Privacy Policy | All Content © Lutz & Company, PC 2021