Topic Thread

Indirect Job Costs

  • 1.  Indirect Job Costs

    Posted 03-05-2018 09:25
    ​So, I've been in the construction industry two years now, but I am still struggling what should or shouldn't be charged to jobs.  All our direct costs go directly to jobs.  However, we seem to have a high SG&A amount compared to others.  Is there a standard of what costs get allocated to jobs?  I think I've seen in this forum where some companies basically allocate all there SG&A.  How do we determine what should and what shouldn't?  I understand the basic concept but what are the factors to consider?  Thank you!

    ------------------------------
    Peter Gauger BS Accounting
    Accounting Manager
    TL Services, Inc.
    Van Buren AR
    (479) 474-7222
    ------------------------------


  • 2.  RE: Indirect Job Costs

    Posted 03-06-2018 06:43
    I think the biggest concern is that whatever you decide, it needs to be in alignment with how you estimate.




  • 3.  RE: Indirect Job Costs

    Posted 03-06-2018 07:42
    Peter, I think you might want to take a look at the description in the "book," section 3.15 (1). It gives a good description of indirect costs and how to allocate. Also, if your company does a lot of government work, indirect costs maybe limited for billing purposes. Generally, I think an indirect cost could be described as any expense that supports the construction effort but is not specific to a single contract. I worked for a large mechanical contractor. We direct costed the labor performed at the "shop," to the projects but the shop rent, utilities, maintenance, unassigned labor (cleanup) were indirect costs. Each company is different. You may have equipment which is depreciated, small tool programs, safety costs etc. Just a few ideas.

    ------------------------------
    Charles Smith, CCIFP CRIS CCIFP
    Vice President-Controller
    Peterson Beckner Industries Inc.
    Houston TX
    (281) 716-4725
    ------------------------------



  • 4.  RE: Indirect Job Costs

    Posted 03-06-2018 11:26
    ​Where do I get the "book"?

    ------------------------------
    Peter Gauger BS Accounting
    Accounting Manager
    TL Services, Inc.
    Van Buren AR
    (479) 474-7222
    ------------------------------



  • 5.  RE: Indirect Job Costs

    Posted 03-08-2018 08:01
    Peter, sorry I don't check the link every day. The "book," is sold by CFMA and is a good reference. Actual title is Financial Management and Accounting for the Construction Industry.

    ------------------------------
    Charles Smith, CCIFP CRIS
    Vice President-Controller
    Peterson Beckner Industries Inc.
    Houston TX
    (281) 716-4725
    ------------------------------



  • 6.  RE: Indirect Job Costs

    Posted 03-14-2018 09:06
    I agree with Charles' comments. When I began, I simply looked at a cost and tried to imagine that if we suddenly had no jobs, would we have that cost? So, for the most part, if we didn't have work, we wouldn't have company trucks. We would still have our yard and office, for a period of time, so I don't charge those to the job. As some have said, the particular contract may limit or direct what can be charged to a project. We have some contracts that don't let us charge cell phones.

    ------------------------------
    Timothy Mickunas CPA, CCIFP
    Chief Financial Officer
    D. Wilson Construction Company
    McAllen TX
    (956) 686-9573
    ------------------------------



  • 7.  RE: Indirect Job Costs

    Posted 03-14-2018 09:50
    ​Interesting, I didn't think of referencing our contracts... Thanks!

    ------------------------------
    Peter Gauger BS Accounting
    Accounting Manager
    TL Services, Inc.
    Van Buren AR
    (479) 474-7222
    ------------------------------



  • 8.  RE: Indirect Job Costs

    Posted 03-06-2018 07:54
    ​Rather than ask what indirect costs to allocate to Job Cost for accounting, the real question to answer is what indirect costs do you include in your Estimate when bidding/negotiating a job.  There is no sense in going through an Accounting exercise if the estimate and costs are based on a different philosophy.  That opens a whole different discussion on Estimating.

    ------------------------------
    Elio Zerbini
    Chief Financial Officer
    Turbull-Wahlert Construction Co., Inc.
    Cincinnati OH
    (513) 731-7300
    ------------------------------



  • 9.  RE: Indirect Job Costs

    Posted 03-06-2018 08:31
    Elio:
    I understand your comment about separating the conversation about the calculation of overhead in estimating from the same subject as it relates to accounting and job cost reporting.  I do not believe these two conversations are that easy to separate, nor are they as distinct as some may think.

    If estimators provide takeoff, estimates and ultimately the proposals (or bids) to your customers, and that Proposal is accepted by the customer and subsequently awarded as a Contract, the information from the estimate becomes the basis of the Base Contract Cost Budget.  In other words, if estimators include different overhead items from the rest of the inclusions by the rest of the team and they are not communicating the components of that overhead calculation, how will Project Managers, Contract Administrators, and Accounting understand where to post actual costs, burden and overhead once the work begins.

    For example, if estimators labor burden includes vacation, holiday, sick pay, and employers share of healthcare expenses, but accounting is charging these same items to General and Administrative Expenses, the original base contract cost budget is skewed and distorted.  The same could be said for Equipment Charges.  If estimators calculate total Equipment Cost which includes Depreciation, Amortization, Interest, and Personal Property Tax, and Accounting Charges these same items to General and Administrative Expenses, or the other expenses below EBITDA,  the estimators Base Contract Cost Budget could be far from accurate.

    I wrote a Blog Article for my largest customer (Corecon Technologies) recently that may be worth your consideration:
    Should Company Overhead Expenses be included in Job Cost Reports?
    Corecon remove preview
    Should Company Overhead Expenses be included in Job Cost Reports?
    Contract Costs usually include direct costs such as materials, labor, equipment, and subcontract costs incurred and are directly related to the installation and preparation of materials and services incorporated into the final construction product. Direct Contract Costs are accumulated and are charged to operations as the related revenue from contracts is recognized.
    View this on Corecon >

    I hope these comments helped in some way.

    Thank you,

    ------------------------------
    David Holler
    Construction Software Consultant and Trainer
    Savage MD
    dholler@softwarepro.construction
    ------------------------------



  • 10.  RE: Indirect Job Costs

    Posted 03-06-2018 11:26
    ​Good read, thank you!

    ------------------------------
    Peter Gauger BS Accounting
    Accounting Manager
    TL Services, Inc.
    Van Buren AR
    (479) 474-7222
    ------------------------------



  • 11.  RE: Indirect Job Costs

    Posted 03-09-2018 09:02
    Have a question on the accounting process of Machinery maintenance and repairs cost. We book all maintenance & repairs invoice cost to SG&A and then reclasss out to Direct Job cost actual based upon actual utilization (we have built a standard chargeback rate for each piece of equipment-we track the utilization of the equipment acitve/inactive periods).  Question #1 is this standard to start with resting the cost in SG&A and chargeback to Direct Job Cost?​

    Thanks​

    ------------------------------
    Lee St. Arnaud CPA
    Controller
    ENTACT
    Westmont IL
    (630) 413-9447
    ------------------------------



  • 12.  RE: Indirect Job Costs

    Posted 03-12-2018 08:44

    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

    scottwallace@ottobaum.com |  www.ottobaum.com

    facebook_icon 2 png  Linkedin2  Instagram Logo png

     






  • 13.  RE: Indirect Job Costs

    Posted 03-06-2018 11:24
    ​Some of this seems to be a "chicken or the egg" discussion.  I want to correctly apply overhead, make everybody understand what is direct and affects gross margin, then what is SG&A to include in the bid development as markup.  Most of our work is government.  If we can attribute an expense to a particular project, we do that and no allocation is necessary.  I suppose we could allocate back office salaries, repair and maintenance, depreciation, etc that applies to all projects, but I'm not clear on the advantage other than it would give us a lower overhead rate, but also a lower gross margin on each project.  I'm not sure how a bonding company, for example, analyzes overhead if there's no standard for what gets allocated to projects across the industry.

    ------------------------------
    Peter Gauger BS Accounting
    Accounting Manager
    TL Services, Inc.
    Van Buren AR
    (479) 474-7222
    ------------------------------



  • 14.  RE: Indirect Job Costs

    Posted 03-06-2018 14:33

    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!



    ------------------------------
    Arin Knudtson CPA, CCIFP
    Chief Financial Officer
    Journey Group Companies
    Sioux Falls SD
    (605) 332-5968
    ------------------------------



  • 15.  RE: Indirect Job Costs

    Posted 03-07-2018 09:37
    ​That helps a lot!  Great summary and description...thanks!!

    ------------------------------
    Peter Gauger BS Accounting
    Accounting Manager
    TL Services, Inc.
    Van Buren AR
    (479) 474-7222
    ------------------------------



  • 16.  RE: Indirect Job Costs

    Posted 03-07-2018 11:17
    Thank you Arin!  That was very helpful!

    ------------------------------
    Megan Barnhart
    CFO
    Frank Schipper Construction Co.
    Santa Barbara CA
    (805) 963-4359
    ------------------------------



  • 17.  RE: Indirect Job Costs

    Posted 03-08-2018 16:41
    I agree with Arin's points.  This is an issue of contract and delivery methods.  Given a cost-plus contract, a company will contractually justify all they can as direct costs, thus minimizing the project overhead and gaining more net profits.

    So it is less a company accounting policy and more a strategic bidding issue.

    This is an awesome thread.  Can I add a question?  Would there ever be a contract scenario where it would be a benefit to reduce direct costs by shifting more to indirects and overhead?


    ------------------------------
    John Killingsworth Ph.D.
    Assistant Professor
    Colorado State University
    Fort Collins CO
    (715) 308-1167
    ------------------------------



  • 18.  RE: Indirect Job Costs

    Posted 03-08-2018 09:50
    ​Peter,

    Most surety companies are going to look at the major line items.  Are officers getting paid $100,000 a year or $800,000 a year?  Does insurance costs seem out of line?  Are there other costs such as rent expense, legal fees, etc that are part of the mix and seem too high.  The answer is it is all relative.  At the end of the day obviously what is important is the bottom line.  Consistency as to how these costs are allocated by the CPA on the FYE f/s and your internal f/s is important too so the surety does not see big profit swings between the WIPs in the CPA f/s and yours.  Lastly, your surety company should welcome the opportunity to discuss this with you.  They may also be able to offer a comparison of your financials to other similar contractors doing your type of work and about your size, obviously without disclosing anyone's information by name.  I have always welcomed the opportunity to have a more in depth discussion with the contractors I work with.


    ------------------------------
    Michael Wiseman AFSB
    Underwriting Director
    CNA Surety
    Charlotte NC
    (704) 362-5775
    ------------------------------



  • 19.  RE: Indirect Job Costs

    Posted 03-06-2018 13:55
    ​One factor that I've been missing is that whether the expenses being allocated can be impacted by PM's that are managing the jobs.  If they are not allocated, it's up to the management level above PM's to analyze and control...  Maybe that's the key.

    ------------------------------
    Peter Gauger BS Accounting
    Accounting Manager
    TL Services, Inc.
    Van Buren AR
    (479) 474-7222
    ------------------------------



  • 20.  RE: Indirect Job Costs

    Posted 03-06-2018 17:22

    Peter,

    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.

    Patrick

     

    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

     

      

     






  • 21.  RE: Indirect Job Costs

    Posted 03-07-2018 09:50

    99% of our work is with the government, all our contracts since I've been here have been fixed price....



    ------------------------------
    Peter Gauger BS Accounting
    Accounting Manager
    TL Services, Inc.
    Van Buren AR
    (479) 474-7222
    ------------------------------



  • 22.  RE: Indirect Job Costs

    Posted 03-07-2018 09:52
    ​Thanks!  The analytics would give me a range at least, that would be helpful.

    ------------------------------
    Peter Gauger BS Accounting
    Accounting Manager
    TL Services, Inc.
    Van Buren AR
    (479) 474-7222
    ------------------------------



  • 23.  RE: Indirect Job Costs

    Posted 03-13-2018 11:47
    Peter,

    If you're looking for a good analytics software application, take a look at Pronovos.  Their software interfaces with almost every ENR as well as Procore and a number of project management applications.


    ------------------------------
    John Killingsworth Ph.D.
    Assistant Professor
    Colorado State University
    Fort Collins CO
    (715) 308-1167
    ------------------------------



  • 24.  RE: Indirect Job Costs

    Posted 03-14-2018 09:27
    ​Thanks, will check it out!

    ------------------------------
    Peter Gauger BS Accounting
    Accounting Manager
    TL Services, Inc.
    Van Buren AR
    (479) 474-7222
    ------------------------------



  • 25.  RE: Indirect Job Costs

    Posted 03-14-2018 09:36
    ​One more question.... We already record costs that can be directly tied to a particular job.  if we were to allocate some costs like depreciation, uniforms, insurance, etc that can't directly be applied to one job, but all or some, would it be appropriate to record a summary transaction (cr)  to SG&A, called maybe "Indirect Job Cost Allocation" and a summary transaction to COGS (dr) called maybe "indirect Job Costs"?  Or are the allocations done to specific accounts like insurance, depreciation, etc...?  Also, would it be appropriate to develop a monthly amount based on prior year averages and then true up at end of year, or even does it need to be trued up?  Thanks

    ------------------------------
    Peter Gauger BS Accounting
    Accounting Manager
    TL Services, Inc.
    Van Buren AR
    (479) 474-7222
    ------------------------------



  • 26.  RE: Indirect Job Costs

    Posted 03-14-2018 09:52
    ​Looking back, Arin addressed some of this!

    ------------------------------
    Peter Gauger BS Accounting
    Accounting Manager
    TL Services, Inc.
    Van Buren AR
    (479) 474-7222
    ------------------------------