Finance and cost control

55 terms in finance and cost control

Work in Progress (construction)(WIP)

Work in Progress reporting, in construction, measures the value of work performed but not yet billed, or billed but not yet performed, across live jobs. It tells a builder whether reported profit reflects real progress rather than the timing of invoices. WIP reporting guide. See also: Over-billing, Under-billing, Profit fade.

Percentage complete

Percentage complete is the proportion of a job that has been earned, most commonly calculated on the cost basis as cost to date divided by forecast final cost. It converts the cost position into earned revenue for WIP reporting, which is why an honest forecast final cost matters more than the arithmetic. WIP formula reference. See also: Earned revenue, Forecast final cost.

Earned revenue

Earned revenue is the percentage complete multiplied by the contract value including approved variations, the revenue a job has genuinely earned regardless of what has been billed. Some builders and accountants call the same figure revenue to date or earned value; what matters is that the business settles on one term and one definition. WIP formula reference. See also: Percentage complete.

Over-billing

Over-billing is billing ahead of earned revenue, claiming more than the work performed to date has earned. It is commonly a liability rather than profit, because the cash collected still has to be built, and a whole company can be over-billed and quietly insolvent on cash. Over and under-billing reference. See also: Under-billing, Billing position.

Under-billing

Under-billing is work performed but not yet claimed, earned revenue running ahead of billing. It is an asset on paper and a cash flow leak in practice, and it is most often administrative, stages finished but claims never assembled. Over and under-billing reference. See also: Over-billing.

Billing position

The billing position is the difference between what a job has billed and what it has earned, positive when over-billed and negative when under-billed. It is the single number the WIP schedule produces per job, and its movement between periods tells the story invoices alone cannot. WIP formula reference.

Front-loading

Front-loading is structuring a claim schedule so early stages carry more value than the work they represent, deliberately billing ahead of cost. It brings cash forward but creates an over-billed position that must be built out later, and done to excess it simply borrows from the end of the job. Over and under-billing reference. See also: Over-billing.

Profit fade

Profit fade is the gradual erosion of a job’s forecast margin across its life, a job that started at one margin and finishes at a visibly lower one. It is the pattern WIP reporting exists to catch early, and the defence is a monthly forecast review that surfaces the fade while it can still be acted on. Profit fade reference. See also: Forecast final cost.

Job costing

Job costing is attributing every cost to the job and cost code that incurred it, so a builder knows the true profit on each job rather than only the whole-of-business result. It is the foundation of cost control, WIP reporting and the forecast, and it fails at data entry before it fails anywhere else. Job costing reference. See also: Cost code.

Cost code

A cost code is the addressing system for job money, the category every estimate line, order, invoice and claim is booked against. Keeping one structure from estimate to claim is what makes variance reports, the cost database feedback loop and WIP possible, and coding discipline at data entry is where it is won or lost. Cost codes reference.

Uncoded costs

Uncoded costs are costs that have hit the job without being attributed to a cost code, usually invoices posted to a catch-all line. They corrupt every report downstream, because a variance report can only be as honest as the coding beneath it. Job cost reporting reference. See also: Cost code.

Job budget

The job budget is the cost baseline a job is controlled against, created when the winning estimate is converted into the working cost plan. What gets lost at that handover, assumptions, exclusions, allowance intent and package boundaries, is where cost control quietly starts failing before the job begins. Estimate to budget handover reference. See also: Estimate to budget handover.

Committed costs

Committed costs are amounts the job is contractually obliged to pay but has not yet been invoiced for, created the moment a purchase order or subcontract is issued. They are the earliest true cost signal on a job, and a builder who only tracks paid costs is looking months behind the work. Committed costs reference. See also: Purchase order, Uncommitted budget.

Accrued costs

Accrued costs are costs for work or goods already received but not yet invoiced, sitting between a commitment and a paid invoice. Distinguishing budgeted, committed, accrued and paid is what lets a job report state a true cost position rather than a payment history. Committed costs reference. See also: Committed costs.

Uncommitted budget

Uncommitted budget is the part of a job budget not yet locked in by orders or subcontracts, the money still genuinely under the builder’s control. It is the real remaining control on a job, because committed money can only be managed, not decided. Committed costs reference.

Cost control

Cost control is knowing the true cost position of a job while decisions can still change it, built on the three-number model of budget, committed and actual plus the forecast to complete. It differs from job cost reporting, which describes what happened; cost control exists to change what happens next. Cost control reference. See also: Cost to complete.

Budget variance

Budget variance is the difference between what a cost line was budgeted at and what it is actually costing or forecast to cost. Sorted by damage rather than by code order, the variance report is the fastest honest answer to where a job is winning and losing. Job cost reporting reference. See also: Variance report.

Variance report

A variance report lists each cost code’s budget against its committed and actual costs, exposing where the job is drifting from the plan. Read regularly and sorted by the size of the damage, it is one of the few reports that actually runs a building company. Job cost reporting reference.

Cost to complete(CTC)

Cost to complete is an honest price on the work remaining on a job, the forward-looking half of the forecast. Uncommitted lines drift back to budget if nobody re-prices them, so a disciplined forecast cadence is what catches trouble while it can still be fixed. Cost to complete reference. See also: Forecast final cost.

Forecast final cost(FFC)

Forecast final cost is what a job will have cost when it finishes, built from cost to date plus commitments plus the cost to complete the remaining work. Its movement between reviews is the number that matters, and it is the denominator of the WIP percentage-complete calculation. Forecast final cost reference. See also: Cost to complete, Percentage complete.

Cash flow forecast

A cash flow forecast projects money in and money out over time, at job level as the cash curve from deposit to final claim and at company level as the rolled-up position across every job. The mid-stage dip, when costs run ahead of the next claim, is where jobs quietly consume the builder’s own cash. Cash flow forecasting reference. See also: Thirteen-week cash forecast.

Thirteen-week cash forecast

The thirteen-week cash forecast is the rolling one-quarter horizon many builders run their working cash position on, near enough to be built from real claims, orders and invoices rather than assumptions, and far enough ahead to act on what it shows. Cash flow forecasting reference.

Construction cash cycle

The construction cash cycle is the pattern of money through a residential job from deposit to final claim and retention, with the builder financing the structural gap between paying trades and suppliers and being paid by the client. Building businesses fail on cash rather than workload, which makes the cycle the first thing to understand. Construction cash flow reference. See also: Working capital.

Working capital (construction)

Working capital, for a residential builder, is the capital tied up funding the gap between money-out commitments and money-in claims across every open job. Deposits, retentions and payment timing lock cash into each job, and working capital, not the order book, is what really caps how many jobs a builder can safely run at once. Working capital reference.

Margin

Margin is profit expressed as a percentage of the selling price. It is not the same as markup, which is expressed on cost, and confusing the two systematically underprices work because a 20 per cent markup is not a 20 per cent margin. Margin and markup reference. See also: Markup.

Markup

Markup is the percentage added to cost to reach a selling price. Because it is expressed on cost rather than price, the same percentage always produces a smaller margin, and the arithmetic difference between the two decides what a builder actually earns. Margin and markup reference. See also: Margin.

Gross margin

Gross margin is revenue less the direct cost of the building work, before overheads, expressed as a percentage of revenue. Watched over time and per job, it is one of the core measures of whether a building business is pricing and delivering well. Builder KPIs reference. See also: Net margin.

Net margin

Net margin is what remains of revenue after direct job costs and business overheads, expressed as a percentage of revenue. It is the measure of whether the business as a whole, not just its jobs, is profitable. Builder KPIs reference. See also: Gross margin.

Overheads

Overheads are the costs of running the building business rather than any one job, the office, salaries, insurance, vehicles and software. They differ from preliminaries, which are the costs of running a specific job, and margin has to cover overheads before it becomes profit. Preliminaries reference. See also: Preliminaries.

GST on a building job(GST)

GST applies across a residential build, on deposits, progress claims and retentions, with the cash-versus-accruals accounting choice deciding when the GST is owed. GST collected is never the builder’s money, and treating it as working cash is one of the classic causes of a BAS shock. General information, not tax advice. GST and BAS reference. See also: Business Activity Statement.

Business Activity Statement(BAS)

The Business Activity Statement is the periodic return an Australian business lodges with the ATO to report and pay GST and other tax obligations. For a builder it pulls together the GST collected on claims and paid on costs across the period. General information, not tax advice. GST and BAS reference.

Margin scheme (GST)

The margin scheme is a GST arrangement that can apply to certain property sales, calculating GST on the margin rather than the full sale price. It applies only in specific circumstances and its use is a decision for the builder’s accountant. General information, not tax advice. GST and BAS reference.

Cash and accruals accounting

Cash accounting recognises income and expenses when money moves; accruals accounting recognises them when they are earned or incurred. For a builder the choice decides when GST is owed and why the profit and loss can look nothing like the bank account. General information, not tax advice. GST and BAS reference.

Tax invoice

A tax invoice is the GST-compliant document a supplier must issue for a taxable sale above the ATO threshold, carrying the details the recipient needs to claim the GST credit. On a building job it is the accounting document, distinct from the progress claim made under the contract. General information, not tax advice. Invoice matching reference.

Accounts payable(AP)

Accounts payable is the workflow of receiving, checking, coding, approving and paying supplier and subcontractor invoices. In a building company it is where invoice matching against purchase orders and job coding either happen or quietly fail, and it is the single biggest admin drain in most building businesses. Construction accounts payable guide. See also: Invoice matching.

Financial visibility

Financial visibility is a building business’s ability to produce its true numbers on demand, the position of any job current within days rather than discovered at month-end. Home warranty underwriters treat financial management as an eligibility question, which makes visibility a licence-to-operate issue as much as a management one. Financial visibility reference.

Construction financial management

Construction financial management is the discipline of controlling the money trail of building work from estimate to final claim, spanning estimating, procurement, cost control, cash flow, WIP and contracts. Builders overwhelmingly fail on cash rather than workload, and this discipline is the difference. Financial management reference.

Break-even

Break-even is the level of revenue at which a building business covers its costs exactly, direct costs plus overheads, with nothing left over and nothing lost. Knowing it tells a builder how much work must be delivered at what margin just to keep the doors open before any profit is earned. Builder KPIs reference. See also: Overheads.

Fixed cost

A fixed cost is a cost that does not move with the volume of work, such as rent, insurance and core salaries. Fixed costs are carried whether the business is busy or quiet, which is why a downturn in work is dangerous long before it shows up as a loss. Builder KPIs reference. See also: Variable cost.

Variable cost

A variable cost is a cost that rises and falls with the volume of work, most of the direct cost of building. Distinguishing variable from fixed costs is what lets a builder work out break-even and understand how profit changes as the order book grows or shrinks. Builder KPIs reference. See also: Fixed cost.

Direct cost

A direct cost is a cost that can be attributed to a specific job, the labour, materials, plant and subcontract work that build it. Direct costs are what job costing captures against each job, and they sit below the line that gross margin is measured on. Job costing reference. See also: Indirect cost.

Indirect cost

An indirect cost is a cost that supports the work but cannot be booked cleanly to one job, such as general supervision, the yard or shared plant. Indirect costs are either recovered through job preliminaries and margin or carried as overhead, and how they are treated changes what each job appears to earn. Job costing reference. See also: Direct cost.

Debtor days

Debtor days measure how long, on average, it takes to collect money after a claim or invoice is issued. On building work the figure drives the cash cycle, because every extra day of debtor days is another day the builder funds the work from its own cash. Construction cash flow reference. See also: Creditor days.

Creditor days

Creditor days measure how long, on average, a business takes to pay its suppliers and subcontractors. Read against debtor days, they show whether the builder is being paid before or after it has to pay out, which is the structural gap the business finances. Construction cash flow reference. See also: Debtor days.

Aged receivables

Aged receivables are the money owed to a builder sorted by how overdue it is, current, thirty days, sixty days and beyond. The aged bands are where slow-paying clients and stalled claims become visible, and where cash is quietly leaking out of the business. Construction cash flow reference. See also: Accounts receivable.

Aged payables

Aged payables are the money a builder owes sorted by how overdue it is. Watched alongside aged receivables and the cash forecast, they show whether the business can meet what is falling due without stretching suppliers past the terms that keep accounts open. Construction cash flow reference. See also: Accounts payable.

Accounts receivable(AR)

Accounts receivable is the money owed to a builder for claims and invoices raised but not yet paid. It is the mirror of accounts payable, and on building work it is dominated by progress claims moving through clients’ payment terms. Construction cash flow reference. See also: Accounts payable.

Profit and loss statement(P&L)

A profit and loss statement reports revenue, costs and the resulting profit over a period. For a builder it can look nothing like the bank balance, because it recognises earned revenue and incurred cost rather than money in and out, which is exactly why cash flow is watched separately. General information, not accounting advice. Financial management reference. See also: Balance sheet.

Balance sheet

A balance sheet is a snapshot of what a business owns and owes at a point in time, and the equity left over. For a builder it is where retentions, deposits held, work in progress and the net tangible asset position that underwrites home warranty eligibility all show up. General information, not accounting advice. Financial management reference. See also: Adjusted Net Tangible Assets.

Chart of accounts

The chart of accounts is the list of categories a business books every transaction into in its accounting system. Aligning it with the job cost codes is what lets the accounts and the job reports tell the same story instead of two different ones. General information, not accounting advice. Cost codes reference. See also: Cost code.

Bank reconciliation

A bank reconciliation is the routine of matching the transactions in the accounting system against the bank statement so the two agree. It is the check that catches missed invoices, duplicate payments and coding errors before they corrupt the reports built on top of them. General information, not accounting advice. Construction software for Xero.

Depreciation

Depreciation spreads the cost of a long-lived asset, such as a vehicle or plant, across the years it is used rather than expensing it all at once. It affects reported profit without moving cash, which is one more reason a builder’s profit and its bank balance rarely match. General information, not tax or accounting advice. Financial management reference.

Input tax credit(ITC)

An input tax credit is the GST a registered business can claim back on the things it buys for the business, offset against the GST it collects on sales. On a building job the credits on materials and subcontract costs are claimed through the activity statement against the GST collected on claims. General information, not tax advice. GST and BAS reference. See also: Business Activity Statement.

Recipient created tax invoice(RCTI)

A recipient created tax invoice is a tax invoice raised by the buyer rather than the supplier, allowed for GST in specific circumstances and under a written agreement between the parties. Builders sometimes use them for subcontractor payments, and the current conditions should be confirmed with the ATO or an adviser. General information, not tax advice. GST and BAS reference. See also: Tax invoice.

GST-free supply

A GST-free supply is a sale on which no GST is charged but for which the supplier can still claim credits on its own costs, distinct from an input-taxed supply. Most residential building work is taxable rather than GST-free, and which category a supply falls into is a question for the builder’s accountant. General information, not tax advice. GST and BAS reference.