BAP Minutes- October 31, 2007
Today’s speaker was Christy Nalley. Ms. Nalley graduated from the University of Alabama with a Bachelor’s and a Master’s degree in accounting. After graduating, she worked in public accounting for six years in Fort Lauderdale, FL. She then moved to Huntsville and was a homemaker for eleven years. For three years, she worked part time at Integraph Public Safety doing special accounting projects. Ms. Nalley was Controller for Baron Services and related companies for four years before beginning work at Enfinger Steele Development in October 2003, where she was controller until recently.
In her presentation, Ms. Nalley sought to deliver the role of accountants in the construction/development business. There are all kinds of opportunities for CPAs as well as other business professions in the construction/ development business. CPAs deal with issues such as licensing requirements, job costing, surety requirements/bonds, internal controls, and cash flows. This business area involves a very high risk followed by a high reward if developers are successful.
CPAs must make sure that the development process is properly set up and licensed. A developer may be set up as an s corporation or limited liability company. A contractor’s license is issued based on compiled, reviewed, or audited financial statements. CPAs help file licenses.There are three types of contractors- design-builder, general contractor, and subcontractor. The design-builder is involved in heavy construction. The general contractor is the prime contractor with the owner of a contract, and the subcontractor is the second level contractor or the contractor working for the general contractor. A contractor can be hired under four different types of contracts. A fixed fee or lump sum contract consists of a fixed contract price. A time and material contract involves billing direct labor at a fixed hourly rate and the cost of materials. Under a cost plus contract, a contractor is reimbursed for allowable costs plus a fee, and under a unit price contract, the contractor is paid a specific amount per unit.
Lots are sold to developers in the number that the developer can develop in a year. This is due to the nature of recording per year the job cost components. It takes the help of accountants to ensure that job cost components are recorded correctly. Job cost components include labor and related payroll costs, materials, subcontract costs, equipment costs, and job overhead. In the construction/development business, costs are recorded as an asset (work in progress) on the balance sheet. It is not until the construction/development is completed and sold that the costs of construction hit the income statement as cost of sales. The development process is divided into different phases. A developer faces a lot of upfront costs during the first phase. For the developer, this is a time of struggle. When costs are increasing, this is the best time for the buyer to buy a house because prices will be the cheapest in the first phase of development.
Accountants are also involved in the bonding process. Bonding is used to ensure that the owner project will be completed for the contract price. The bond is secured by an entity called a surety. An accountant must make sure that the owner of the bond can afford it by examining financial statements, previous loans, assets, and experience completing similar projects. The accountant is also involved in internal controls. Just like any other business, this involves receipts, approval, etc. For example, the accountant would want to make sure that lumber charges recorded coincide with the job under contract.
The cash flows are very important in the construction/development business. It takes the help of accountants to make sure that cash receipts are planned because timing is crucial. Budgets are prepared and followed as closely as possible to maintain an adequate supply of cash. This is part of the risk involved. If developers are not able to recoup those upfront costs in the first phase of development, they may be forced to file for bankruptcy or lose the ability to uphold to amenities promised in the first phase, which may damage their reputations. GAAP requires contractors be paid according to the percentage of completion method when budgets or estimates can reasonably be depended on.
Ms. Nalley suggested that youput effort into learning all you can while in college. Putting forth your best effort to learn will enable you to learn even more when you get out!
Lindsey Taylor- BAP, Reporter