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Accrual Accounting
What is Accrual Accounting?
Accrual accounting is a method of accounting that records financial events based on occurrences rather than on cash flow. In the context of the construction industry, this could include recognizing revenues and expenses tied to a specific project when they are earned or incurred, not when the money is actually received or paid out.For example, if a construction company orders materials for a project, under accrual accounting, the expense is recorded as soon as the order is made, regardless of when the actual payment is made. Similarly, if a customer is billed for a completed phase of the project, the revenue will be recorded even if the cash hasn't been received yet. This type of accounting provides a more accurate picture of a construction company's financial health by aligning income and expenses to the appropriate fiscal periods. It enables firms to match revenues with the corresponding costs, delivering a holistic view of a project’s profitability. However, it can also complicate cash flow management as there may be a time lag between recorded revenue and actual cash receipt.
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Other construction terms
What are Preliminary Notices?
Preliminary Notices are legal documents that are commonly used in the construction industry. These notices are also known as pre-lien notices or notices to owner. They are typically sent at the beginning of a construction project by the subcontractors, suppliers, or equipment renters, essentially anyone who does not have a direct contractual relationship with the property owner. The main purpose of these notices is to inform the property owner, general contractors, or other party with financial interest in the property, of the sender's involvement in the project and their right to file a lien in the event they are not paid for the services or materials provided. It's an essential step in securing one's right to payment. Moreover, Preliminary Notices serve as a professional way to maintain transparency and communication in construction projects and promote smoother and more prompt payments.
What is a Completed Contract?
A completed contract, in the context of the construction industry, is a concept relating to the financial recognition of a project. In specific accounting terms, it represents a method where all the costs and profit related to the contract are recognized only after the project has been finished and fully executed. This means neither revenues nor expenses are recorded in company books until all the work stipulated in the contract is fully accomplished. This approach contrasts with the percentage-of-completion method, which requires ongoing recognition of revenues and costs as the project advances. The completed contract method is often chosen for projects where outcome and costs are uncertain, essentially to prevent financial discrepancies.
What is a Guaranteed Maximum Price (GMP)?
A guaranteed maximum price (GMP) is a financial cap used in construction contracts, representing the highest possible price a client can expect to pay for a particular project. This cap encompasses raw materials, labor, indirect costs, and a margin for the contractor’s profit.
While offering financial predictability and safety to the client, this method can significantly impact subcontractors. To transfer a portion of the financial risk, general contractors (GCs) typically offer subcontractors fixed-price (or lump sum) subcontracts. This setup incentivizes subcontractors to adhere to budgets and timelines, as cost overruns directly affect their profit margins (unless the client was the one who requested changes). Conversely, if the project is completed under budget, subcontractors may benefit by sharing the savings with the GC. Ultimately, GMP contracts foster transparency and collaboration, promoting shared responsibility for project success between all parties involved.
In GMP contracts where payments are tied to milestones or completion percentages, accurate pay applications—a core feature of Siteline—are crucial to getting paid sooner. Siteline also enables subcontractors to track outstanding balances and monitor their cash flow in real-time, empowering them with insights to proactively manage their financial health—which is paramount in GMP contracts. Ready to take control of your cash flow under GMP contracts? See how Siteline can help by scheduling a demo today.
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