What is a Lien?

Generally Accepted Accounting Principles (GAAP) are a set of standardized rules and procedures in accounting to provide consistency in financial reporting across different entities. In the construction industry, GAAP are of particular importance due to the unique nature of accounting involved. For instance, consideration of revenue recognition when recognizing costs for long-term projects is guided by GAAP. Under GAAP, the percentage of completion method is commonly used, allowing companies to report income as the work progresses, thus providing a more accurate view of the financial health of a construction company. Similarly, fixed asset accounting, inventory valuation, recognition of liabilities, and depreciation methods are all guided by GAAP in the construction industry. By adhering to GAAP, the construction industry ensures transparency, consistency, and comparability in its financial information, promoting investor confidence and informed decision-making.

Cost Plus Billing in the construction industry refers to a method where the customer agrees to cover the actual costs, expenses and other direct costs of the construction project plus an additional sum for contractor’s overhead and profit. These typically include costs of materials, labor, and subcontractor charges. The agreement clearly establishes and defines what is constituted as cost, the overhead percentage, and the profit percentage, reducing the risk of any surprise costs. Essentially, the 'Cost' represents the direct costs of the construction, while the 'Plus' is the contractor's fee and is usually agreed upon as a fixed percentage of the total costs or as a target price with a shared savings clause.

Net Income, in the construction industry, is a crucial financial measure representing the company's profitability after accounting for all expenses, tax obligations, and income from all sources. It is calculated by deducting operating costs, like labor, materials, equipment costs, overheads, taxes, and interest on loans, from the total revenue generated by the company. It is also known as net profit or bottom-line. The performance of a construction company and its ability to stay viable, fund its growth, or service its debts depend on its net income. A firm with a consistently high net income can attract investment, retain talent, and outlast competitors. Do note, though, that net income can fluctuate greatly in construction due to the project-based nature of the business.