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Cost of Goods Sold (COGS)
What is Cost of Goods Sold (COGS)?
Cost of Goods Sold (COGS) in the construction industry represents the direct costs associated with the production of goods or services that a company sells. These costs may comprise the cost of raw materials such as lumber, steel, concrete; direct labor costs; storage costs, and direct utility costs. It can also include direct expenses like subcontractor costs, labor burden (i.e., benefits, insurance, taxes related to employee wages), material costs, and equipment costs that are directly attributable to a project's completion. COGS does not include indirect expenses such as sales and distribution costs or overhead costs such as office rent and utilities. In essence, COGS in construction is directly tied to specific projects and is a key factor in determining a project's gross profit and thus a company´s profitability.
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Other construction terms
What is a Chart of Accounts?
A Chart of Accounts (COA) in the construction industry is essentially a financial organizational tool that provides a complete listing of every account in an accounting system. These accounts are typically used to categorize financial transactions that a business has to deal with to conduct its everyday operations. In construction, the COA may include accounts such as materials, labor costs, subcontractor fees, overhead expenses, equipment costs, and liabilities. Different project types will often require different charts of accounts. Furthermore, the COA assists in organizing the company's finances and ensuring accurate financial reporting, it's also important for identifying the total costs of a construction job, tracking profit margins, and analyzing expenses. It's a critical tool in managing a construction company's finances.
What are Assets?
Assets, in the context of the construction industry, refer to any owned resources or properties that add value and can be converted into cash. There is a vast range of assets in construction, including land, buildings, machinery, vehicles, materials, and tools. Even intangible items like contracts, licenses, brand reputation, and technical know-how are also considered assets. Investments in staff training, software systems, patents, and copyrights also represent assets as they contribute to the operational efficiency and competitiveness of the construction company. Therefore, asset management is vital in construction for optimal utilization and maintenance of these assets.
What is Leverage?
Within the construction industry, "leverage" often alludes to the concept of using a relatively small initial investment, or resources such as machinery, time, or manpower, to gain a high return. This generally references the strategic procurement and deployment of resources or borrowed capital to increase the potential return of an investment. Leverage is particularly strategic in construction management, as it allows contractors to undertake larger projects than they could otherwise afford, enhancing their potential profit. For instance, the acquisition of a construction crane may require a significant upfront investment, but allow for much more effective work on high-rise projects, enabling the contractor to command a higher price for the job. Therefore, the term "leverage" refers to optimizing resources or borrowed funds to increase efficiency, achieve greater scale and amplify profits in construction ventures.
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