That is how we do it also.
Scott Wallace | Controller
Otto Baum Company, Inc. | 866 N. Main St.| Morton, IL 61550
Office 309-266-7114 | Direct 309-284-1704 | Fax 309-263-1050
email@example.com | www.ottobaum.com
Peter -I spent 5 years in public accounting auditing and reviewing construction companies of various types and sizes (general contractors, subcontractors, family owned, management owned, >$100 million, <$10 million, etc.). In my opinion, there is not a "standard" that fits the construction industry as a whole as much of this discussion depends on the financial goals and reporting objectives of the Company, how the Company measures and analyzes profitability, the delivery method of projects (hard bid, cost + fee, etc.), contractual obligations with project owners, etc.I agree with most that accounting allocations need to be in alignment with estimating (and be consistently applied), however, I do not think one drives the other. Rather, it is based on a mutual understanding of financial goals and reporting objectives of the Company - and then putting processes in place in both accounting and estimating that achieve the common goals and objectives. By allocating the indirect costs to individual projects, you are able to get a true understanding of profit on a project(s). Additionally, if you are performing under a cost plus fee contract, allocating allowable costs to projects results in being reimbursed for said costs by the owner.I believe that Charles Smith had a good definition of indirect costs as costs that "support construction effort but not specific to a single contract".We have allocations (that are automated by the system) for the following:- Safety Expenses (% of Labor)- Shop/Small Tools Expenses (% of Revenue) - most fleet costs are direct costed to jobs through internal rental rates (per hour, week, month, etc. that covers the cost of ownership, repairs, fuel, etc.). However, we have an additional allocation to cover other small tools, cost of operating a shop, etc.)- IT Expenses (% of Revenue)- Insurance Expenses (if not applied through labor burden, they are applied through % of revenue).We understand that some of our indirect allocated costs could be direct job costed (i.e. they are used on a specific project), however, the transactions are typically insignificant and there tend to be a very large number of similar transactions. As such, it is deemed more efficient (lean accounting) to allocate the costs at the end of each month based on labor or revenue as it is an automated process and eliminates several accounting transactions each month. We allocate based on a cost budget for the year (as either a % of revenue or % of labor), not based on actual costs. Any under or over allocation hits SG&A (specifically the department that controls the costs). This results in the project manager being able to more accurately estimate for these costs in the project.I hope this helps you analyze your own situation, and discover what works and what doesn't.Thanks!
I hope all is well. There was a good thread on this last year that you might want to look up on the portal. Much of the time the contract structure will help inform this decision. If the project is cost plus, you will want to refer to the definition of cost of work to guide this. In general you will find that home office expenses are excluded, except for project managers and project support staff directly assigned to a project. The type of costs that typically get rejected are people like us in standard office\admin type roles, general office overhead, etc. The CFMA analytics also offer some strong comparison tools to let you see how you are performing against your peers in terms of company size, location, industry, etc.
I hope this is helpful.
R. Patrick Lloyd | Chief Financial Officer Golden Construction, LLC 2212 First Avenue South Birmingham, AL 35233 www.goldenconstruction.com P. 205.327.6617 | C. 205.283.8936 | F. 205.327.6667
99% of our work is with the government, all our contracts since I've been here have been fixed price....