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BACKGROUND:
 The construction industry is highly fragmented, composed of many different types of companies, including commercial, real estate, and several smaller niches. The industry constructs everything from office and retail buildings, hospitals, hotels, schools, prisons, airport terminals, warehouses, stadiums, and dwellings, to private homes, apartments, and condominiums. Heavy construction includes roads, bridges, manufacturing plants, and dams. Most companies specialize in only a few, or just one, type of building construction, since the demonstrated ability to successfully complete a project is prime criteria for winning a contract. Within a single project, some contractors may specialize in "ground up" work (foundation, floors, walls, roof) or in more profitable "finish work" (interior walls, electrical, painting, plumbing, HVAC.) In this industry, inflation is measured by three special indexes, which each company tracks individually by their own expense sheets. The first one is the Construction Cost Index (CCI), made up of construction costs and common labor and average wages. The second is the Building Cost Index (BCI), made up of building costs, skilled labor costs, and average wages. The last index is the Materials Cost Index (MCI), made up of construction materials, such as cement, steel, and lumber costs. Most projects are awarded through one of two types of contracts: fixed price or cost plus fee. In some cases, a cost-plus-fee arrangement may include a guaranteed maximum. The guaranteed maximum cost contracts require the project owner to pay for costs, materials, and other incidentals up to a maximum amount, after which the contractor is responsible for additional costs. Under fixed price contracts the contractor keeps any cost savings that result from the difference between the total project cost and the projected amount. In the cost-plus-fee scenario, the owner pays all costs, including the contractor’s fee. The more cost risk the contractor is willing to assume, the greater the opportunity for profit. Roger Liska, chairman of Clemson University’s Department of Construction Science and Management has recently concluded a research project regarding the concerns of smaller mom-and-pop construction companies. The unique issues facing the family owned contractors are often predictable. The results of Liska’s study indicate: Trends/Challenges and Threats/Opportunities The contractor faces many exciting opportunities, such as:  The industry trends reflect the technological advances, increased expertise, and new methods for doing business, including the following: -
Specialization -
Guaranteed Maximum Price Contracts -
Joint Ventures/Pooling Expertise on Projects -
More Frequent Equipment and Staff Leasing Contractors face threats from the new economy, human resource issues and others: Key Problems Associated with Construction Businesses Contractors face a number of problems for which accounting and consulting services should be considered. Some of the more significant problems are outlined in the grid below. | Key Problems | Possible Services Needed | | Lack of a skilled labor force Delivery system challenges—some companies need to determine what they are good at and concentrate on it Controlling costs | - Strategic planning
- Business plan development
- Budgeting
- Operational review
- Contract administration
- Cash flow projections
- Outsourcing accounting services
| | Technology consulting Business continuity | - Technology analysis and implementation (review accounting/job costing/ estimating systems)
| Additional accounting and consulting services needed by construction contractor clients include: - Individual and business tax returns
- Financial statements
- Various tax studies such as comparing the cash vs. accrual method of accounting
- Retirement planning
- Estate planning
- Ratio and trend analysis
- Business valuation
- Cost segregation studies
<%# SESSION("FullSiteID") %>Support The firms that focus on the construction niche benefit from the following <%# SESSION("ShortSiteID") %>niche resources: -
Availability of specialized training and certification, the Construction Industry Technician (CIT) program designed by NAWIC and Clemson University -
Strategic alliance with the Clemson University Dept. of Construction Science and Management and access to industry research, industry insights, and other practical information -
Annual construction niche program in conjunction with the AICPA Construction Conference -
Three niche conference calls annually focusing on significant topics within the industry -
A quarterly client newsletter, Dimensions, focusing on the needs of contractors -
E-Mail distribution lists and threaded discussion lists targeted to construction. -
Niche text that is appropriate for use promoting the firm’s construction expertise in brochures, proposals, on the website, or in other publications Recommended Training To remain competitive in today"s environment, accounting firms need specialized training to provide the best service possible to their construction clients. PKF North American Network member firms are dedicated to keeping ahead of the curve by taking advantage of various training opportunities. During the initial phase of getting their construction niche off the ground, one firm invited individual contractors to come in and talk with them. They learned what concerned the contractors in terms of their business and the industry at large. Another firm sends a number of staff to Fails Management Institute, an industry leader in consulting to contractors. They follow up with press releases promoting their attendance. Other training attended by members include the following: -
The industry has its own terminology, i.e., gross profits vs. a mark up on direct costs, that accountants should understand. Below are some resources that can help you become more familiar with the industry and its language. - industry audit guides (SOP 81-1)
- construction accounting manuals produced by:
Practitioners Publishing Company
3200 Collinsworth Drive
Fort Worth, TX 76107
800-323-8724 Warren Gorham & Lamont
31 Saint James Avenue
Boston, MA 02116
(617)423-2020
http://www.riahome.com - Construction dictionary published by the National Association of Women in Construction
NAWIC Education Foundation
P.O. Box 37069
Raleigh, NC 27627
(866)277-2883
http://nawiceducation.org - Financial Management and Accounting for the Construction Industry (reference book) by Construction Financial Management Association
CFMA
29 Emmons Drive
Suite F-50
Princeton, NJ 08540
(609)452-8000
http://www.cfma.org
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