Construction Accounting and Financial Management / Edition 1

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Focusing on the principles of accounting and financial management needed to make construction projects and companies financially successful, Construction Accounting and Financial Management provides the background for prospective and practicing construction managers. Making no assumptions about any special training, Professor Peterson leads the reader step by step through the business practices needed for solid decision making. All applications are related to the construction field. Some of the key features include:

  • Determining the profitability of different construction activities, project types, and potential customers, allowing managers to focus on the best aspects of their business.
  • Projecting costs from the first subcontract and purchase order as well as potential cost overruns so they can be quickly addressed.
  • Projecting cash flow and cash requirements so managers can adjust business practices to avoid cash shortages.
  • Tracking and accounting for heavy equipment costs, allowing managers to fairly charge them to the project and to determine the profitability of equipment use.
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Product Details

  • ISBN-13: 9780131109391
  • Publisher: Prentice Hall
  • Publication date: 4/30/2004
  • Edition description: Older Edition
  • Edition number: 1
  • Pages: 576
  • Product dimensions: 7.62 (w) x 9.38 (h) x 1.43 (d)

Read an Excerpt

A few years ago I was asked to teach a course on construction accounting and finance. The course was to cover the fundamental principles needed by construction managers to successfully manage the finances of construction companies. In preparing to teach this course I found that these principles were scattered among many disciplines, including business management, engineering economics, accounting, estimating, project management, and scheduling. After I reviewed the available textbooks, two things were apparent. First, the material was often presented in a generic fashion and failed to address how the principles applied to the construction industry. For example, in most accounting textbooks only a few pages were devoted to the accounting procedures for long-term contracts, which comprise a bulk of the projects for general construction companies. Second, with the topics scattered among many disciplines and textbooks, the topic of how the different components of construction financial management were interrelated and interacted was being ignored.

Financial management may be defined as the use of a company's financial resources and encompasses all decisions that affect a company's financial health. Many everyday decisions affect a company's financial health. The difference between a marginally profitable and a very profitable company is good financial management. Business schools teach the fundamental principles of financial management; however, because of the many unique characteristics of the construction industry, the usefulness of these financial principles as taught by business schools is limited. To be useful, these principles must be adapted specifically to the constructionindustry. For example, in the construction industry equipment is mobile and may be needed for multiple jobs during a single month. Traditional accounting methods and financial statements do not allow a company to properly manage and account for its equipment.

This book was written to help construction professionals-both those who are working in the construction industry and those seeking a degree in construction management—learn how the principles of financial management can be adapted to and used in the management of construction companies. This book will be most useful for general managers and owners of companies who are responsible for managing the finances of the entire company; however, many of these principles are useful to project managers and superintendents. For the project manager or superintendent who desires to stand out in a company, there is no better way than to improve the profitability of their project through the principles of sound financial management. The book also discusses how owners and general managers can manage construction projects- by sound management of their project managers, superintendents, and crew foreperson.

This book explains common financial principles, demonstrating how these principles may be applied to a construction situation and how these principles affect the financial performance of a company. Many of the examples included in this book are based on actual situations encountered by the author.

This book is organized in five parts: introduction to construction financial management, accounting for financial resources, managing costs and profits, managing cash flows, and making financial decisions.

  • The first part—comprising Chapter 1-introduces the reader to construction financial management, explains why construction financial management is different than financial management in other industries, and defines the role of a construction financial manager.
  • The second part—comprising Chapters 2 through 6—describes how to account for a company's financial resources. Accounting for these resources is built around a company's accounting system.
  • The third part—comprising Chapters 7 through 11—examines how to manage the costs and profits of a construction company. This must be done at the project level as well as at the company level.
  • The fourth part—comprising Chapters 12 through 16—looks at how to manage a company's cash flows and how to evaluate different sources of funding cash needs.
  • The fifth part—comprising Chapters 17 and 18—explores ways to quantitatively analyze financial decisions.

After reading this book, you should have a better understanding of the following:

  • The basic financial principles that are widely used in the business world and how to modify them so that they work for the construction industry. Application of these principles will help you better manage your business.
  • Construction accounting systems, which will help you manage the accounting systems and use accounting information to manage a company.
  • Financial and accounting principles, so that you may interact with accountants and bankers at a professional level.

This textbook brings all of the key financial management principles needed by construction managers under one cover, addressing how they are applied in the construction industry and how they interact. Many of the examples in this book are based on my fourteen years of experience in construction financial management. Join me on a journey of discovery as we discuss the fundamental principles of financial management that are needed to make a construction company a financial success.

Particular thanks are due to Laura Lucas (Indiana University-Purdue University, Indianapolis), Jonathan Shi (Illinois Institute of Technology), and Brent H. Weidman (Brigham Young University) for their assistance with the text review.

Best Wishes,

Steven J. Peterson, MBA, PE

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Table of Contents

Ch. 1 Construction financial management 3
Ch. 2 Construction accounting systems 17
Ch. 3 Accounting transactions 45
Ch. 4 More construction accounting 77
Ch. 5 Depreciation 91
Ch. 6 Analysis of financial statements 117
Ch. 7 Managing costs 147
Ch. 8 Determining labor burden 167
Ch. 9 Managing general overhead costs 183
Ch. 10 Setting profit margins for bidding 209
Ch. 11 Profit center analysis 223
Ch. 12 Cash flows for construction projects 245
Ch. 13 Projecting income taxes 279
Ch. 14 Cash flows for construction companies 297
Ch. 15 Time value of money 325
Ch. 16 Financing a company's financial needs 361
Ch. 17 Tools for making financial decisions 409
Ch. 18 Income taxes and financial decisions 457
App. A Computerized accounting systems 479
App. B Trend analysis 485
App. C Derivation of selected equations 493
App. D Interest factors 497
App. E Amortization schedule 529
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