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Financial Management and Accounting Fundamentals for Construction

ISBN: 978-1-118-17427-2
320 pages
September 2011
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Successful financial management in the construction industry begins with this hands-on guide

While construction professionals are skilled in the technical side of their work, they often find the financial management aspect of the business daunting. Financial Management and Accounting Fundamentals for Construction will help you better understand and navigate the financial decisions that are part of every construction project.

This book is a compact summary of the basic financial skills that a construction professional must have to be successful in the management of a construction company and its projects. Its topics address many of the questions that any construction administrator will face, such as:

  • How to organize and use a company's financial reports

  • What amount of cash must be made available to the contractor to complete a project

  • Why the early payment of supplier invoices can enhance profitability

  • How to quantify the time value of money in financial decisions

  • What tax amount is owed by a company and how it impacts the bottom line

  • How to control project costs

  • What financial sources are available to a construction contractor for capital expansion

In this text, you will learn about accounting fundamentals, project-related financial matters, and company level financial issues—three factors that are key to your career success. An ideal reference for students of construction management and engineering, as well as professionals who need a quick refresher when dealing with cost control analysis and other financial issues, this text also offers:

  • Easy-to-understand coverage of financial concepts specific to the construction industry, including business taxation, project control, engineering economy, and financial forecasting

  • Numerous worked examples, plus end-of-chapter review questions and exercises

  • Helpful appendices that present the structure of a typical chart of accounts, the flow of transactions through a construction accounting system, and tables required for computing interest and the time value of money

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Preface.

1 Introduction.

The Big Paradox.

What Is Financial Management?

Project-Level Controls.

Time Value of Money.

Entrepreneurial Issues.

Review Questions And Exercises.

2 Understanding Financial Statements.

Introduction.

Why Should You Care About Accounting?

Generally Accepted Accounting Principles.

Cash and Accrual Bases: Two Ways to Look at Accounting.

Cash Basis of Accounting.

Accrual Basis of Accounting.

Accounts.

Account Hierarchy.

Financial Reports.

Bookkeeping.

The Balance Sheet.

Balance Sheet Layout.

Balance Sheet Account Categories in Detail.

The Fundamental Accounting Equation.

Asset Values.

The Fundamental Equation and Owners’ Risk.

Balance Sheet for Fudd Associates, Inc.

Key Accounts.

The Income Statement.

Components of an Income Statement - More Details.

The Statement of Cash Flows.

Contract Backlog.

Public Corporations.

Review Questions and Exercises.

3 Analyzing Company Financial Data.

Introduction.

Vertical Analysis: Financial Ratios.

Liquidity Indicators: Can This Company Get Cash in a Hurry?

Profitability Indicators: Is This Company Making Enough Profit?

Efficiency Indicators: How Long Does it Take a Company to Turn over Its Money?

Capital Structure Indicators: How Committed Are the Owners?

Other Indicators.

Horizontal Analysis: Tracking Financial Trends.

Time Series Graphs.

Conclusion.

Review Questions and Exercises.

4 Accounting Basics.

Introduction.

Transaction Processing.

Journalizing the Transaction.

Posting Entries to the Ledger.

Relationship of Work- in-Progress and Revenue/Expense Accounts.

Closing the Accounting Cycle.

Recognition of Income.

Transactions during a Period.

Posting to the General Ledger during the Accounting Period.

Closing Actions at the End of the Period.

Review Questions and Exercises.

5 Project-Level Cost Control.

Objectives of Project-Level Cost Control in Construction.

Unique Aspects of Construction Cost Control.

Types of Costs.

The Construction Estimate.

Cost Control System.

Building a Cost Control System.

Cost Accounts.

Cost Account Structure.

Project Cost Code Structure.

Cost Accounts for Integrated Project Management.

Earned Value Analysis.

Labor Data Cost Collection.

Review Questions and Exercises.

6 Forecasting Financial Needs.

Importance of Cash Management.

Understanding Cash Flow.

Retainage.

Project Cost, Value and Cash Profiles.

Cash Flow Calculation -A Simple Example.

Peak Financial Requirements.

Getting Help from the Owner.

Optimizing Cash Flow.

Project Cash Flow Estimates.

Using Software for Cash Flow Computations.

Company-Level Cash Flow Planning.

Strategic Cash Flow Management: "Cash Farming".

Project and General Overhead.

Fixed Overhead.

Considerations in Establishing Fixed Overhead.

Breakeven Analysis.

Basic Relationships Governing the Breakeven Point.

Review Questions and Exercises.

7 Time Value of Money and Evaluating Investments.

Introduction.

Time Value of Money.

Interest.

Simple and Compound Interest.

Nominal and Effective Rate.

Equivalence and MARR.

Discount Rate.

Importance of Equivalence.

Inflation.

Sunk Costs.

Cash Flow Diagrams.

Annuities.

Conditions for Annuity Calculations.

Calculating the Future Value of a Series of Payments.

Summary of Equivalence Formulas.

Worth Analysis Techniques: An Overview.

Present Worth Analysis.

Investments with Different Life Spans.

Equivalent Annual Worth (EAW).

Internal Rate of Return.

Limitations of the IRR Method.

An Example Involving Cost Recovery.

Comparison Using EAW.

An IRR Example-Owner Financing Using Bonds.

Review Questions and Exercises.

8 Construction Loans and Credit.

Introduction.

The Construction Financing Process.

A Sample Developmental Project.

The Amount of the Loan.

How Is the Cap Rate Determined?

Mortgage Loan Commitment.

Construction Loan.

Lines of Credit.

Interest Paid on Outstanding Balance.

Commitment Fees.

Compensating Balances.

Clean-Up Requirement.

Collaterals.

Accounts Receivable Financing.

Trade Credits.

Long Term Financing.

Loans with End-of Term Balloon Payments.

Review Questions and Exercises.

9 The Impact of Taxes.

Introduction.

Types of Taxes.

Income Tax Systems.

Alternatives for Company Legal Organization.

Taxation of Business.

Business Deductions in General.

Taxable Income: Individuals.

Itemized Deductions, Standard Deductions and Personal Exemptions.

The Tax Significance of Depreciation.

Calculating Depreciation.

Straight-Line Method.

The Production Method.

Depreciation Based on Current Law.

Marginal Tax Rates.

Tax Credits.

Tax Payroll Withholding.

Tax Payment Schedules.

Marginal, Average and Effective Tax Rates.

Net Operating Losses.

Taxes on Dividends and Long-Term Capital Gains.

Alternative Minimum Tax.

Summary.

Review Questions aAnd Exercises.

Appendix A - Typical Chart of Accounts.

Appendix B - Further Illustrations of Transactions.

Appendix C - Compound Interest Tables.

References.

Index.

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Daniel W. Halpin is Professor Emeritus and former head of the Division of Construction Engineering and Management at Purdue University. The author of more than ten books, he is a member of the National Academy of Construction, a recipient of ASCE's Peurifoy Construction Research Award and the Carroll H. Dunn Award of Excellence from the Construction Industry Institute (CII).

Bolivar A. Senior is an Associate Professor in the Department of Construction Management at Colorado State University. He has extensive professional experience in the management of construction projects. Dr. Senior has published many articles relating to construction financing as well as time planning and control. He is a member of the American Society of Civil Engineers and the Dominican College of Professional Engineers, Architects and Surveyors.

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