1. Is There a Proper Accounting for Indirect Costs?
Presented By:
Bob Biehl, CPA, CCIFP
Director of Construction Industry Services
GBQ Partners LLC

2. Director of Construction Industry Services
Bob Biehl, CPA & CCIFP is the Director of Construction Industry Services at GBQ Partners LLC in Columbus, Ohio, where he began his career 28 years ago after receiving a Bachelor’s Degree from Ohio University. Bob serves over 50 construction clients and is active in over 9 construction trade associations including CFMA and CICPAC. Bob has served on the following CFMA National Committees: The Executive Committee; Leadership Committee; Chapter Resource Committee; Bob is Chairman of the ICCIFP and has served on the ICCIFP Question Writing Committee. In addition, Bob is Past President of CICPAC.
Bob Biehl, CPA, CCIFP
Director of Construction Industry Services
GBQ Partners LLC
230 West Street, Suite 700
Columbus, OH
(614)

3. Goals
Understand:
How accurate job costing fits into the whole construction process
The importance of knowing all your costs:
The difference between direct costs, indirect costs and general and administrative costs.
How to properly account for each of the above types of costs.
How to properly account for under/over allocated indirect and equipment costs.

4. Goals
Understand:
The impact of NOT allocating all indirect and equipment costs to contracts on the percentage-of-completion and to loss contracts.
The importance of not reconciling open and closed job schedules to the financial statements.

5. How Job Costs are Related to the Entire Construction Process
Estimating
Construction
Accounting
Analysis (monitoring) and wrap-up

6. Construction
Accounting
Estimating
Analysis /
Wrap-up
The
Circle

7. Why is Knowing Your Costs the Most Important Aspect of Construction Accounting ?
It helps you:
In the bidding process.
Determine problem jobs and people.
Price change orders.
In the claims process.
Reconcile job cost reports to the financial statements.
Make better business decisions.

8. Direct Costs
Direct costs include all costs which can be directly identified with an individual job.
Direct job costs allow you to measure your actual performance against your estimate.
Best in Class contractors identify and charge as many costs directly, along with pooled direct and indirect costs.

9. Typical Direct Costs Labor and Burden (allocated from indirect pools)
Materials
Subcontracts
Equipment
Owned (directly charged – hourly, daily, etc.)
Rented (directly charged, but has allocations to it – fuel, insurance, etc.)
Bond Costs
Insurance (can have both direct and indirect components)
General Conditions
Labor burden is a hybrid, because much of the burden is not incurred unless there is direct labor charged to the job.

10. Labor Burden Calculation Workpaper
Field Labor
1. Company Share—F.I.C.A.
7.65%
2. Workers’ Compensation
4.44%
3. Federal Unemployment
0.80%
4. State Unemployment
1.20%
5. Liability Insurance
6. Vacation (a)
5.35%
7. Health Insurance (b)
10.99%
8. Other: 401(k) (c)
2.08%
Total
32.52%
(a) Vacation & Holiday Calculation
Total vacation & holiday weeks
64 divided by total work force weeks in a year
$1,196 = 5.35%
(b) Health Insurance Calculation
Total health benefits payment for a month
$2,638 divided by the total payroll for a month
$24,000 = 10.99%
(c) 401(k) Calculation
Total 401(k) benefits paid for a month
$500 divided by the total payroll for a month
$24,000 = 2.08%
Input:
# of field employees
Work weeks
Vacation weeks
Monthly field payroll
Monthly health benefits paid
Monthly 401(k) benefits paid 23 52 64
$24,000
$ 2,638 $

11. Indirect Costs
Indirect costs typically cannot be “directly” identified to a specific project, but primarily relate to the completion of multiple direct activities occurring on different projects.
Common indirect costs (four major pools):
Overhead (project-related)
Safety (non-project specific)
Small Tools and Supplies
Training
Indirect costs are allocated to projects using logical costs aggregation (pools) and applying those costs, based on a direct cost component.

12. Indirect Pools – Allocation Bases “Consistency is Critical”
Labor
Indirect (vacations, holidays)
Burden (FICA, unemployment)
Project Overhead
Supervision (if not charged direct)
Overhead (rent, related costs)
Purchasing Department
Equipment
Fixed and Operating Costs
Allocation calculation:
Indirect Cost Pool =
Direct Cost Base
Allocation Basis
Direct payroll dollars/hours
Direct payrolls
Direct payroll hours
Total project costs
Direct materials and subcontractors
Equipment run hours
Equipment run and idle hours
Indirect Cost Rate

13. Development of Indirect Cost Allocation
Development of Pools and Bases.
The company builds an annual plan. A critical focus is the market.
The plan builds budgets – Revenue and Costs.
Budgets identify direct and indirect costs:
Pools (numerator) – Buckets of costs to be allocated
Bases (denominator) – Method to spread cost
Budgets establish estimating rates for the direct and indirect costs.
Budgets establish job cost, equipment and plant charges, etc.
Rates are consistent between estimating and job cost.
Rate variances are reviewed, as well as the plan, throughout the year.

14. Examples of Overhead Allocation Methods – Direct Labor
Allocation based on direct labor costs of $59,000
Burden rate:
$17,500 ÷ $59,000 = 29.66%
Direct x
Burden =
Allocated
Labor
Rate
Overhead
Contract A
23,000 $
29.66 %
6,822
Contract B
4,000
1,186
Contract C
32,000
9,492
59,000
17,500

15. Examples of Overhead Allocation Methods – Materials
Allocation based on direct labor costs of $63,700
Burden rate:
$17,500 ÷ $63,700 = 27.47%
Direct x
Burden =
Allocated
Material
Rate
Overhead
Contract A
21,000 $
27.47 %
5,769
Contract B
13,200
3,626
Contract C
29,500
8,105
63,700
17,500

16. Discussion Question
Do you reallocate under or over applied indirect costs (excluding equipment) to contracts?

17. Break Even Analysis Definition: Example 1 – Fixed Overhead 1 2 3
General Administrative Expenses/Gross Profit = Breakeven Sales
Example 1 – Fixed Overhead
Overhead 5,000,000 5,000,000 5,000,000
Gross Profit % 13% 18% 25%
Breakeven Sales Mil Mil Mil

18. Break Even Analysis Example 2 – Fixed Gross Profit 1 2 3
Overhead 5,000,000 6,000,000 7,000,000
Gross Profit % 18% 18% 18%
Breakeven Sales Mil Mil Mil

19. General and Administrative Costs
General and administrative costs are NOT direct or indirect costs.
These costs should include the cost of running the office, accounting, human resources, information technology and marketing the business.

20. Overhead Recovery
Single Percentage – Overhead costs at $200,000 divided by total costs at $1,000,000 = 20% to be recovered
Duel Percentage - Overhead costs at $200,000 with material at $100,000 and labor at $400,000 than you would add 20% to material and 80% to labor to recover the $200,000.

21. Levels – Using Factoring
Multiple Overhead Recovery (Material, labor, equipment and subs)
General standards
Material 5%
Equipment 15%
Subcontractors 5%
Labor remaining amount not covered by others

22. Equipment Costs
Many contractors believe that the equipment is FREE once it is acquired!
They never charge equipment to a job. They consider equipment an overhead cost.
Remember:
EQUIPMENT is a CHOICE NOT to use LABOR! (It is cheaper in some third-world countries to use labor rather than equipment.)

23. Creating an Equipment Cost Center
Costs to include:
Acquisition and Financing Costs
Depreciation
Interest

24. Creating an Equipment Cost Center
Costs to include:
Operating Costs
Maintenance
Repairs
Insurance
Taxes
Fuels and Oils
Labor

25. How Do You Allocate Equipment Costs to Jobs?
Hourly? Daily? Weekly?
Customer Billing Rate? Internal Cost Rate?
Third-Party Rate Book?
Idle Rate? Operating Rate?

26. Calculating and Equipment Rental Rate (Example)
Acquisition Cost: $45,000
Interest/Internal Capital Cost (8.5%): 10,394
Subtotal $55,394
Estimated Years in Service
Annual Acquisition Cost and
Internal Cost Recovery $ 7,913

27. Calculating and Equipment Rental Rate (Example)
Operating Costs:
Repairs $ 6,000
Taxes 450
Insurance 450
Fuel and oil 5,100
Equipment management ,350
Annual Operating Costs $ 13,350

28. Calculating and Equipment Rental Rate (Example)
Annual Acquisition and
Interest Cost Recovery $ 7,913
Annual Operating Costs 13,350
Total Annual Costs $ 21,263
Annual Service Hours ,100
Average Equipment Rate per Hour $

29. Other Rate Considerations
Salvage Value?
Interest Rate?
Inflation rate for replacement cost?
Inflation rate for fuels and oils?
Don’t forget the cost of add-on
pieces of equipment:
GPS
Buckets
Etc.

30. Do you reallocate under or over applied equipment costs to contracts?
Discussion Question
Do you reallocate under or over applied equipment costs to contracts?

31. Reconciling Job Schedules to Income Statement
Revenue – potential issues
Costs – potential issues
Credibility

32. QUESTIONS ??