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INFORMATION FLOW BETWEEN ESTIMATING AND JOB COST ACCOUNTING By Kenneth Alan Bertolini A THESIS Submitted to Michigan State University in partial fulfillment of the requirements for the degree of MASTER OF SCIENCE Building Construction Management Agricultural Engineering 1 999 ABSTRACT INFORMATION FLOW BETWEEN ESTIIVIATING AND JOB COST ACCOUNTING By Kenneth Alan Bertolini Construction estimating determines the cost of the construction project. This stage lays the groundwork for how the success of the project will be measured throughout the construction process. The estimate will become the reference standard for the cost control when the project is executed. Despite its importance, the estimate is not effectively or efficiently utilized by most construction companies after the estimate has been developed. The purpose of this research project is to define the relationship between job cost accounting and construction estimating. J ob cost accounting is viewed as the utilization of the construction estimate during the construction process. The overall objectives of the research include: (1) Define the information requirements of job cost accounting by modeling the information flow between estimating and job cost accounting. (2) Determine the instances of information duplication between estimating and job cost accounting. (3) Explore the use of computer integration for the effective and eflicient use of information between these two functions. Dedicated to: My mother, Louise Bertolini, for her love of knowledge My father, Leo Bertolini, for his dedication to education under adversity My wife, Katherine Bertolini, for continual support, love, and encouragement Acknowledgments I would like to thank Dr. Matt Syal for the amount of responsibility he gave me while I was working with him. His level of knowledge and love for education is contagious, and I am a better person for knowing him. Thank you for your work ethic and your friendship. Table of Contents 1.1. 1.2. 1.3. 1.4. 1.4.1. 1.4.2. 1.4.3. 1.4.4. 1.5. 1.6. 1.6.1. 1.6.2. 1.6.3. 1.6.4. 1.6.5. 2.0 2.1. 2.1.1. 2.1.2. 2.1.3. 2.2. 2.2.1. 2.2.2. 2.2.3. Overview Problem Area Research Objectives Research Methodology Timberline Extended Estimating Timberline Job Cost Module Model Development and Case Study Simulation Existing Research Review13 Expected Output Organization of the Thesis Chapter 2: Existing Research and Literature Review Chapter 3: The Planning Information Required for Estimating and Job Cost Integration Chapter 4: Setup and Functioning of a Computer-Based Job Cost Accounting System Chapter 5: Case Studies: Model Implementation Chapter 6: Summary and Conclusion Chapter Two An Integrated Model of Computer-Aided Cost Estimating/ Scheduling in Construction Management Overview Output Critique Automated Interactive Cot Estimating Systems for Reinforced Concrete Building Structures. Overview Output Critique iii 11 ll 12 13 15 15 15 l6 l6 17 18 18 19 19 19 20 21 22 22 22 24 2.3. 2.3.1. 2.3.2- 2.3.3. 2.4. 2.4. 1 - 2.4.2- 2.4.3- 2.5. 2.5.1 . 2.5.2- 2.5.3. 2.6. 3.1. 3.2. 3.3. 3.4. 3.4.1. 3.4.2. 3.5. 3.6. 3.7. 3.8. 3.9. 3.9.1. 3.9.2. 3.9.3. 3.9.4. 3.9.5. Cost, Schedule, and Time Variances and Integration Overview Output Critique Heavy Construction Estimates, with and without Computers Overview ‘ Output Critique Introducing New Process Technologies into Construction Companies Overview Output Critique Conclusion Organization Breakdown Structure (OBS) Work Breakdown Structure (WBS) Accounting Financial Accounting Model Journals General Ledger Job Cost Accounting System Cost Accounting Codes Job Cost Reports Cost Estimates The Estimating Process Detailed Study of the Plans and Specs Divide Plans into Preliminary Building Systems Develop Work Categories and WBS Collect Costs Final Estimate iv 25 25 25 26 26 26 27 28 29 29 30 31 32 34 38 41 42 42 42 44 48 50 52 53 54 54 54 55 55 3.10. Integrating Job Cost Accounting and Estimating 3.1 1. Construction Project Planning 3.12. Cash Cycle of a Construction Company 3.13 - Integrated Approach to Estimating and Job Cost Accounting 3.14- Estimating - Job Cot - Financial Accounting 4.1. Introduction 4.2. Setting Up Timberline Accounting 4.3. Company Set-Up in the Timberline Gold Accounting System 4.3.1 - Irreversible Decisions within the General Ledger 4.3 .2- Irreversible Decisions within the Job Cost Module 4.3.3. Processing Control Decisions 4.3-4. Report and Inquiry Decisions 4.4. System Requirements 4.5. System Setup for TS Gold 4.6. Example Company 4.7. Creating of a Company within Gold Extended Timberline Software 4.7. 1. Creating a New Company 4.7 .2. Enter Accounting Information 4.7.3 - Establish a Window Icon for Your Company 4.8. General Ledger Set-Up Decisions 4.8.1- Enter the Account Structure for your Company 4.32. Set Up General Ledger Controls 4.83. Creating the Prefix (company) Configuration for the General Ledger 4.8.4. Creating the Prefix (division) Configuration for the General Ledger 4.35. Create Base Account 4.8.6. Generate Accounts 4.8.7. Establish the Suspense Account 4.9. Job Cost Set-Up Decisions 4.9.1. Defining the Job Number (Job Format) 57 57 62 65 71 74 74 75 75 77 81 84 86 87 87 89 89 91 93 95 95 97 97 97 98 99 99 99 99 4.9.2. Define Phase Format 4.9.3. Create a Job Cost Master File 4.9.4. Set-Up Standard Categories 4.1 0. Establishing an Estimate 4.10 - 1. Set-Up Requirements for Timberline PE Extended 4.10 - 2. Creating a Work Package Estimate in PE Extended 4.1 O - 3. Creating a Work Package Estimate 4.1 1 - Integration of the Estimate and Job Cost module 4.1 1 - 1. Creating the Interface From Precision Estimating and Job Cost Accounting 4.1 2- Finalizing the Integration of the Estimate within Gold Extended 4.12. 1. Directing the .JCT File into the Job Cost Module 4.1 3. Processing within Gold Extended 4.1 3 . 1. Enter Descriptions to Phases 4.1 4. Applications and Reporting within Gold Extended 4.1 4.1. General Ledger 4.14.2. Job Cost Reporting 4.1 5. Summary 5.1. Introduction 5.2. Value Chain 5.3. Value Chain for a Typical Construction Company 5.4. Value Chain Model 5.4.1 - Value Chain Symbols 5.4.2 - Value Chain Financing Process: 5.4.3 - Value Chain Subcontractor/Labor Process 5.4.4- Value Chain Material Acquisition Process 5.4.5. Value Chain Equipment Acquisition Process 5.4.6. Value Chain Construction Process 5.4.7. Value Chain Contract (Phase) Finalization 5.4.8. Value Chain Model Description vi 10 101 101 102 104 101 111 12! 12( 12' 12', 122 121 12' 121 12! 131 13 13' 132 131 132 132 13‘ 13‘ 5.5. 5.5.1. 5.5.2. 5.5.3- 5.5.4. 5.5.5- 5.5.6- 5.6. 5.7. 5.8. 5.9. 5.10- 5.10- 1. 5.10.2. 5.10.3. 5.10.4. 5.10.5. 5.10.6. 5.10.7. 5.10.8- 5.10.9. 5.11. 5.12. 5.13- 5.14- REA Modeling REA Entities REA Relationships REA Attributes REA Agent REA Resource REA Event REA Model REA Model of the Construction Company REA Model for the Typical Construction Company Construction Company REA Model Construction Information System Set-Up Model Company Format Accounting Method Balance Sheet Level Fiscal Controls Job Description and Numbering Base Accounts Estimating Database Numbering System Resource Use Billing Level Job Cost Reports Information Flow Model Application of the Model in Case Studies Commercial Construction Company 5.14- 1. Information System Model: Commercial 5.14 -2. Analysis: Commercial Construction 5 . 14.3. Construction Information System Set-Up Model: Commercial Construction 5.14.4. Commercial Construction Company feedback: vii 136 138 138 138 138 139 139 139 140 143 145 146 148 149 150 151 151 152 152 153 154 156 156 158 158 159 161 162 164 5.15. Residential construction company 5.15.1. Estimating 5.15.2. Accounting 5.15.3. Residential Information system: Estimating and Job Cost accounting 5.15.4. Residential Construction Company Analysis: 5.15 - 5. Residential Information System Set-Up Recommendations 5.15 - 5.1. Company Format 5.1 5 - 5.2. Balance Sheet Level 5.1 5 - 5.3. Job Description and Numbering 5.15 - 5.4. Estimating Database Numbering System 5.1 6- Residential Construction Company Feed back 5.1 7. Chapter Summary 6.1 . Research Results 6.1.1. Organizational Structure 6.1 -2. Information flow 6.1 .3. Information System Set-Up Model 6.2 Case Studies 6.3 - Research Contributions 6.4. Future Research 6.5. Limitations of Current Research 66. Conclusion References viii 164 165 166 166 167 169 171 171 171 172 172 173 174 175 175 175 176 177 177 178 178 180 List of Figures I—l Figure 3.1 Organizational Breakdown Structure Figure 3.2 OBS: Main Oflice-Field Personnel Figure 3.3 Financial Accounting Model Figure 3.4 Information Flow Through Job Cost Accounting Figure 3.5 Cost Estimating Model Figure 3.6 Construction Project Planning Stage Figure 3.7 The Cash Cycle of a Construction Firm Figure 3.8 Construction Project Planning Model >°9°>1F3‘.V‘:‘>P’.N Figure 3.9 Estimating-J ob Cost Integration Model )u-i O . Figure 3.10 Integrated Estimating-Job Cost—Financial Accounting Model 11. Figure 4.1 Irreversible Decisions 12. Figure 4.2 Processing Controls Decisions 13. Table 4.3 Report and Inquiry Decisions 14. Figure 4.4 Creating a New Company in Timberline 15. Figure 4.5 Setting the Accounting Method 16. Figure 4.6 Creating a Window Icon 17. Figure 4.7 Account Structure 18. Figure 4.8 Defining Job Number 19. Figure 4.9 Edit Database 20. Figure 4.10 General Company Information 21. Figure 4.11 Job Cost Information 22. Figure 4.12 Produce Estimate 23. Figure 4.13 Computer Drive Selection 24. Figure 4.14 Estimate Cover Sheet 25. Figure 4.15 Job Cost Set-Up 26. Figure 4.16 Work Package Estimate Set—Up 27. Figure 4.17 Entering Dimensions ix 35 36 44 47 56 58 60 63 68 72 80 83 85 90 92 94 96 100 106 106 107 107 109 109 111 111 112 28. Figure 4.18 Standard Estimate 29. Figure 4.19 Interface Options 30. Figure 4.20 Generate To Job Cost 31. Figure 4.21 Job Cost Transaction Report 32. Figure 4.22 Job Cost Transaction Grand Total Report 33. Figure 4.23 Master File Update 34. Figure 4.24 Job Cost Set—Up Summarization Model 35. Figure 5.1. Construction Process Value Chain 36. Figure 5.2 REA modeling of Financing 37. Figure 5.3 REA Modeling: Construction Resources 38. Figure 5.4 REA Model: Construction Process 39. Figure 5.5 Typical Construction REA Model 40. Figure 5.6 Construction Information System Set-Up Model 41. Figure 5.7 Information Flow Model 42. Figure 5.8 Commercial Construction Information System (Existing) 43. Figure 5.9 Commercial Construction Set-Up Model (Proposed) 44. Figure 5.10 Residential Information System Model (Existing) 45. Figure 5.11 Residential Set-Up Model (Proposed) 113 116 116 117 117 124 126 130 141 142 142 145 155 157 160 163 167 170 Chapter One Introduction to Problem area 1.1. OVERVIEW: Construction companies historically have had substantial differentiation between the estimating and accounting departments and information shared between the two departments has been minimal. Information transfer and utilization is an important aspect for any company relying on inter-departments fulfilling similar tasks- The estimate establishes the cost of the project prior to construction in companies that use separate estimating and accounting departments. The estimating department determines the actual cost after the completion of the project or its phases. When estimating the project costs, the estimator goes further than simply determining the dollar figure associated with the particular job. The project is first divided into its individual components. Depending on which estimating method is chosen (i-e., individual item take—off , work package take-off, etc.) the estimator will break down the project into the smallest components needed to accurately place fixed costs on each activity. Furthermore, the reduced components are determined in order to associate the proper resources that are needed to accomplish the work task. The actual costs are only determined after the resources have been established. Traditional financial accounting methods determine the costs of the actual project and disassociate other relevant information needed by the estimator such as resources. These resources include: (1) labor, (2) equipment, (3) materials, and (4) subcontracted work. Financial accounting can be viewed as the measurement of the specific and actual costs associated with the construction of the project. It is the author’s belief that the estimating and accounting departments of a construction company is one of the areas where the information flow can be improved dramatically. Historical data consolidated by the accounting department can be a usefill form of information for the estimator if the information is more specific than just the actual cost. The speed at which the information is determined will play a critical factor on the relevance of the information flow between accounting and estimating. Computer technology has changed the way many businesses operate. The computer’s ability to manipulate data has helped companies become more efficient by giving timely and accurate information. The construction industry is one industry that can benefit the most from the speed of the computer. Time is always of the essence for any construction project. The author believes that other industries have the benefit of operating under much longer time frames, and also in more controlled settings. Industry’s that operate within the confines of an enclosed building, such as manufacturing, have most or all of the workers on site for a particular amount of time per day, as well as the resources required for the manufacturing process. Manufacturing the same product over again also allows for a more thorough estimate for time and money. Even when a construction company constructs the same building more than once, weather, subcontractor availability, and small changes required by different owners can drastically alter the time and cost of the project. The construction industry generally operates under much shorter time frames and less controlled settings. The final estimate of the project often is not determined until the construction process is complete. Information is dissected after the actual costs and resources are determined upon completion, then compared to the original budget. Control can be defined within the construction industry as calculating variances between actual measured cost and progress on one hand and target budgets and schedules on the other, then determining if operations are being performed as intended (Kangari & Miyatake, 1993). Job cost accounting helps to determine if operations are being performed as intended by measuring costs, as well as the resources used in the completion of a project. Where traditional accounting is more concerned with just the cost aspect when measuring the success of a project, job costing takes into consideration all of the resources and costs. This is accomplished prior to the completion of the project. When an estimate is developed, the resoirrces are a key factor in determining costs. Resources need to be measured and checked against the budget to help ensure success on a current project as well as future projects. 1.2. PROBLEM AREA An important contributor to the success of a construction project is the collection of actual costs related to the project by both the estimating and accounting departments. A construction company understands that no two projects will be the same, but historical information is the beginning of any construction planning stage, including estimating. Historical information is adjusted for the uniqueness of the firture project and should be utilized for the estimate of the current project (Mott, 1981). Typically there is a distinct separation between the estimating and accounting departments. This separation is in part due to the individualization of information that the two disciplines have established as important. It is the author’s belief that accounting is a practice that has a predetermined set of information that needs to be tracked, measured, and reported. Income statements, accounts, and reporting to the government are some of the procedures that need to be followed without deviation, and with a high degree of consistency. Wrthout this consistency, boards of directors, owners, banks, and government would not have a way of measuring financial activities that they are directly involved. Estimating cannot claim such a lengthy development process. Today, the practice of estimating still relies on very important information that can only be found in the “back of the hea ” of only one or a few members of a construction company. Informal records may be kept but most companies lack a formal structure or system. The problem is how to track the amount of resources and the costs that are being used in the actual construction of the project. It makes sense that since the resources and costs have already been estimated, the measurement of the actual costs needs to be performed by the accounting department. In order to measure the actual costs of the resources, the whole accounting system needs to be changed so it can measure construction resources as well as the cost associated with them. Job Costing is the accounting process that monitors the actual costs, as well as labor, equipment, materials, and subcontractors. This information is then compared to the original budgeted amount determined by the project estimate (Clough and Sears, 1991). The construction industry has become increasingly sophisticated in regard to job cost accounting systems. These systems are aimed at generating financial information and providing management with information fiom processing financial transaction data. Increasing construction costs have increased the importance of information usefirl for management decisions (Adrian, 1979). Prior to job costing, accountants were only concerned with the actual cost of the project and disregarded the differences of estimated resources compared to actual resources- Resources are an important aspect of the estimate that not only helps determine the success of the current job, but also allows the estimator to be more accurate for future estimates. Without this historical information the estimator is not able to utilize a very important tool of comparing the actual cost with the budgeted amount during the construction process. Important information that is processed in the Job Cost system are the budget estimates, actual cost, forecasts, variances, and reasons for variances (Clough and Sears, 1991). The integration of information between the estimating and accounting department needs to be processed into a system that accommodates the need for historic information allowing the estimator to develop a more accurate project estimate. The initial flow of information at the inception of the system is one that has already been established by the project estimate. The estimate is then used by the accounting department as a basis for costs that are associated with the construction of the project. The area of concern which is the point of this research project is the information that is accumulated through accounting and then transferred back to estimating. Currently, it is common practice to divide a project using the sixteen Construction Standards Institute (CSI) divisions. Projects may be subdivided firrther using the subdivisions of the CSI format. The accounting department establishes what the actual cost of construction was for the individual subdivision and determines if the division is either over or under the original estimated amount. It is the author’s opinion that this system of accounting does not offer enough information for the estimator to properly evaluate the differences and determine the true reason for the variance(s). It is then less pragmatic to deem this information usefiil as historical information to be used for the estimate of the next construction project. Additional items that need to be measured and reported by the accounting department are the resources that make up the final cost of construction. This additional degree of measurement can be accomplished by substituting a job cost accounting system in place of the traditional accounting system. Many construction companies utilize a computer based estimating program, and also use a computer based accounting system. Very few companies use an integrated estimating and accounting system. Often times the estimating computer system is nothing more than a simple spread sheet developed by the estimator. Software is available that integrates estimating and job cost accounting. Although the software is readily available, implementation can be very time consuming and difficult. For the purpose of this research effort, I have chosen to use Timberline Precision Extended estimating software (Timberlinem, © 1990-1994), and the Timberline Gold Job Cost Accounting software (Timberlinem, © 1990—1994) have been used. Timberline is a respected and reputable name for construction software. A company determined to implement an integrated job cost accounting and estimating system should survey their needs and establish a methodology of implementation. If a model is established that can easily correlate the information that is shared between accounting and estimating, the implementation process can occur more readily. If a company can visualize the structure that will allow a successful implementation, the model will be able to determine areas of the organizational structure that will require re- engineering. Re-engineering can be defined as the area(s) of the company that will require a degree of change in order to implement the new system. Re-engineering is one way to replace an old system that is unable to meet the current and future needs of a company. In order to implement a new system, the structure of different departments of the company need to be evaluated and modified to best suit the needs of the new system. The analysis, design and implementation of information systems is critical when establishing a system for any company. Research done in this area has determined that it is critical to emphasize the design and use of logical models where the introduction of physical implementation detail is deferred as long as possible (McCarthy and Rockwell, 1994). When designing an information system, a company needs to go through certain steps to insure a correct design. The steps include: (1) the survey process, (2) the structured analysis process, (3) computer hardware requirements, (4) software requirements, and (5) implementation (McCarthy and Rockwell, 1994). The survey process includes both what already exists (the current system), and what the system should accomplish. It is critical to determine the design and use of logical models and actually implement the hardware and software as late in the process as possible. The reason for the late implementation of the actual system is due to the fact that there is always a degree of implementation compromise when implementing software. It is important to mention that implementation compromise is critical when software is being custom designed, and even more critical for commercially available software. Custom software is designed particularly for a company’s specific needs. Compromise is necessary when it is too lengthy, time consuming, or economically impractical to design certain requirements into the software. Typically, commercially available software is more generic and therefore intrinsically less suited for a specific company’s needs, but is also less expensive and more readily available than customized software. It is more important to decide what is required of the system for a specific company prior to the installation of the new system. It is not sufficient to decide what is needed of the system now, but also what will be required as the company grows into the future. If a system can be established that can accommodate firture company growth and changes, less modification of the system will be needed at a later date. Computer integration in the construction industry is not a new concept, but it is not being utilized to its fiill potential. Computer integration software for estimating and scheduling is available commercially. The construction industry can benefit more than most due to the relatively short construction cycle of a project and the speed and accuracy of computer technology. Software can currently be purchased that ofl‘ers the availability of integration between job cost accounting and estimating. What needs to be considered is the amount of work that needs to be done prior to installation of the software and decisions that need to be made while setting up the new system. Companies must evaluate their needs and determine a methodology of implementation in order to fully maximize the potential of the computer and software. The separate estimate and cost accounting systems currently used by construction companies to control a project do not provide adequate information relevant to the decision making process while the construction process is underway. A job cost accounting system integrated with the estimate can effectively render information pertinent to cost decisions that need to be made to ensure a profitable job. A model that determines the information flow from the beginning of the estimating process to the conclusion of the accounting process will help a company evaluate all of the variables needed to put an integrated system into place. 1.3- RESEARCH OBJECTIVES: The purpose of this research is to define the relationship between job cost accounting and the construction estimating process. The research gathered will: (1) explain the information flow between financial accounting and estimating, (2) review the possible use of a job cost accounting system within a construction company, (3) model the flow of information between construction estimating and financial accounting via job cost accounting, and (4) explore the use of computer integration for the effective and eficient information processing between these entities. The primary objective of this research effort is the identification and modeling of information flow between estimating, job cost accounting, and financial accounting. The outcome of this research will identify the procedures a typical construction company would use in order to effectively plan and implement an integrated job cost accounting and estimating system. It is not as simple as loading the software and running it. The company needs to develop a re—engineering mentality and review its accounting and estimating departments in order to have them fimction in unison. The second objective is to identify the problems that can arise in implementing such an integrated system The identification will be developed via an implementation model that will list some of the difiiculties that the author encountered while establishing an integrated job costing and construction estimating using the Timberline Gold Accounting system. Appropriate solutions will allow the company to overcome most, if not all of the potential problems. Case studies will be used to establish a simulated situation where integration, re- engineering, and implementation of the system is determined. The developed model will be applied to case studies and its effectiveness evaluated. Efi°ectiveness will be evaluated by the ease of use by comparing the information that is required for the model and its effective usefulness upon completion. Effectiveness will also be measured by the detail of procedures and the complexity of updating the company’s information while actually implementing the model within the case studies. 10 Extensive work has already been done on the information flow of resources needed for the estimating process. This research effort will evaluate the job cost accounting cycle as viewed by a typical commercial construction company and develop a model that combines the like items associated with the accounting, job costing, and estimating cycles. Also, the model will help determine current and future requirements of the system that will help establish a usefirl system that is more closely correlated to the specific needs of the company. 1.4. RESEARCH METHODOLOGY: This research study is expected to be relevant and useful to the construction industry today. The need for integrated information systems is an important area needing improvement. This is established through current research work and the evaluation of current computer software. 1.4. 1. TIMBERLINE EXTENDED ESTIMATING The first phase of research involves the familiarization of Timberline Extended estimating program. The author has had extensive experience with this program through a graduate teaching assistantship at Michigan State University, Building Construction Management program for B.C.M. 324-Construction Estimating. Work packages will be used when importing estimates from Timberline Extended into the Timberline Job Cost module. Use of work packages are used for the quickness of the estimate development, and because a 11 company using this estimating package will develop their own work packages rather than developing individual item estimating take-offs. 1.4.2. TIMBERLINE JOB COST MODULE The next phase of research is the familiarization with Timberline Job Cost. Although this was developed by the same company as the estimating package, it is a very difficult and an involved process to use the program. Extensive set up time is required in order to have the packages operating efficiently and integrated with each other. The author has found that it is easier to integrate estimating and scheduling software from two different software companies than integrating estimating and job cost accounting fi'om the same software company. This is due to the vast difference between the process of accounting and estimating. Accounting keeps track of many different cost ledgers. As one inputs information regarding a transaction, the appropriate ledger is updated accordingly. This phase required literature review of job cost manuals, as well as computer time in order to become fluent in the operation of the module. Assistance from a Timberline licensed sales and training representative was utilized in order to shorten the learning curve. This phase also required learning additional and separate Timberline accounting modules. It was important at this phase to also become familiar with Timberline General Ledger, Accounts Payable, and Recievables Management. These are the accounting ledgers that the job cost module will automatically update when using the job cost module. The 12 general ledger modules, job cost module, and estimating package were all purchased separately from Timberline and required an acute understanding prior to their implementation. It is imperative that the language used within each module is consistent for the integration to be a success. The estimating department of a construction company commonly uses the CSI format to identify all the items that constitute an estimate. It is essential that all of these items to be transferred into the accounting system and have the same identification numbers for job, phase and sub-phase. As an individual item is transferred from estimating to job cost accounting, it will have the same identification number in job cost that it had in the estimate. 1.4.3. MODEL DEVELOPMENT AND CASE STUDY SIMULATION: A model will be developed to demonstrate the flow of information from the estimating department to the accounting department and help to establish the importance of integrating estimating with job cost accounting. The model will show the importance of accurate measurement of resources during the construction of a project and of using the original estimate as the measuring stick for accuracy. The model will provide the framework for designing and implementing an integrated system that keeps track of the variances between estimated costs and actual costs determined in the field. Because of the amount of information that needs to be processed in a relatively short period of time using a job cost accounting system, it would be impractical to implement a 13 manual job cost accounting system. Computers allow the system to be more flexible, accurate, and timely. The estimate is at the inception of the information gathering process, and relies on updated historical information. By taking advantage of the resource organization processed during the estimating stage and using it in a job cost system, a construction company can expect to have better control over its project. The control will pass onto the next project by utilizing the updated historical costs generated by the previous projects. Future estimates will become more accurate using information provided by past projects and variances can between projects can be tracked and accounted for. The model will give a detailed breakdown of organizational structure and resource requirements needed to restructure the organization. It will also give a breakdown on how to correlate the information from the project estimate to cost accounting. Two companies were chosen as case studies to analyze the current systems in place and to evaluate the model for the purpose of an integrated estimating and job cost accounting system. This simulation was used to test the model and validate the need for a structuring tool for re- organization. Time was spent evaluating the companies’ current systems and the need for an integrated system. The estimating and accounting departments were evaluated to establish if they would operate efficiently if they became integrated. One point of critical importance was to determine if a job cost accounting system was in place, and at what time the final determination of cost over-runs or savings is completed. 14 1.4.4. EXISTING RESEARCH REVIEW: Also included in the research will be the review of existing research. This will include theses pertaining to both job cost accounting systems and estimating, as well as research papers written about the integration of accounting and estimating. 1.5. EXPECTED OUTPUT: This research study is intended to determine the practicality of integrating a job cost accounting and estimating system within an existing construction company. By creating a model to aid in the implementation process, the procedure of determining the methodology for the implementation as well as help to expedite the system within an organization where time is of the essence is expected to be simplified. The research will provide guidelines for the application of a similar system with minimal difliculty, and provide guidelines for users of such a system. It will also provide areas where additional research and restructuring needs to be applied prior to the system being developed. This study will also provide valuable information to the companies used as case studies regarding their current system, as well as begin the process of system review, evaluation, and implementation steps required for a more efficient and timely system. 1.6. ORGANIZATION OF THE THESIS: The remaining chapters of the thesis are organized as follows: 15 1.6.1. CHAPTER 2: EXISTING RESEARCH AND LITERATURE REVIEW Chapter 2 describes the existing research and literature review. The current work that has already been researched, and any implications that it may have on the research and findings of this work is presented as well as whether the existing research correlates with what is established with this research project and where it may differ. Existing theses and research will be reviewed and summarized. 1.6.2. CHAPTER 3: THE PLANNING INFORMATION REQUIRED FOR ESTIMATING AND JOB COST INTEGRATION Chapter 3 will lay the ground work for the planning information required for estimating and job cost integration. Since the information that is gathered initially is that of the estimate, definitions of terminology used for the estimate will be covered including: (1) organization breakdown structure, and (2) the work breakdown structure. Using the organizational breakdown structure and the work breakdown structure will be the recommended way that an estimator determines the phase and categories for individual resource items of the estimate. The traditional financial accounting system will be explained through the use of j ournals and the general ledger. The job cost accounting method will be reviewed as a viable alternative to traditional accounting for the purpose of an integrated estimating and accounting system. Cost account codes that make up the job cost system will be evaluated, as well as job cost reports that aid the management decision making process. 16 The estimating process will be evaluated to determine its suitability to be integrated with the job cost accounting process. An estimating model will be shown that details all aspects of the estimating process, as well as recommending a systematic approach to estimating. By creating a uniformed systematic estimating approach, an independent process, such as job cost accounting, will be easier to incorporate into the established system. Construction project planning will be shown and described within the context of its usefirlness for providing an integrated job cost-estimating system. The cash cycle of a construction company will be evaluated to determine if the operations of the company are eficient, or if the cash systems need to be modified prior to establishing an integrated estimating—j ob cost system. Lastly, the integrated job cost-estimating model will be explained. 1.6.3. CHAPTER 4: SETUP AND FUNCTIONING OF A COMPUTER-BASED JOB COST ACCOUNTING SYSTEM Chapter four will lay the groundwork for setting up an integrated job cost and estimating system using the Timberline Gold system. Recommendations for company structure, dependent on company size, are explained throughout the process. This chapter establishes how involved the actual process is even for a commercial purchased software product. Many decisions need to be made prior to loading the system to ensure that the 17 correct settings are made as well as extensive knowledge regarding company estimating and accounting practices to insure a proper procedural setup. Chapter four will conclude with the setup requirements for an integrated job cost accounting and estimating system through the Timberline Gold Extended Accounting software, and Timberline Extended Estimating software. 1.6.4. CHAPTER 5: CASE STUDIES: MODEL IMPLEMENTATION Chapter five will describe the models established for the purpose of this project. The models are explained in detail so the reader has an understanding how they function when they are put into use in the case studies. How the models are applied in the case studies will also be described so the reader can understand the reasoning behind the creation and have an understanding of its efl‘ectiveness. The companies that are used as the case studies will be evaluated with a summary of the current systems that are in use. The models will then be applied to determine what the company is either lacking and/or needs. The models will show the integration of the accounting and estimating departments and what is needed in order to facilitate necessary change(s). The field data that is collected will be presented to the companies, and any comments by the parties involved will also be included in this chapter. 1.6.5. CHAPTER 6: SUMMARY AND CONCLUSION Chapter 6 completes this research effort with the conclusions reached by the author and recommendations for the future research within this research area. 18 Chapter Two Existing Research and Literature Review 2-0. Chapter two describes the existing research and literature that has influenced this research work. The existing research is reviewed within this chapter, and the focus of the research is evaluated as it afieas the output for this research project. 2.1. “An Integrated Model of Computer-Aided Cost Estimating/ Scheduling in Construction Management”- Appau, Kwaku Addae 2.1.1 Overview “An Integrated Model of Computer-Aided Cost Estimating/ Scheduling in Construction Management” shows the correlations between computer aided cost estimating and scheduling. Similarities between the two are described through the use of the work breakdown structure (WBS). A construction project that is to be estimated will follow the WBS to determine the individual elements that make up the project. The WBS allows the project to be broken down to a simple level and costs to be allocated with each level. This will also allow the integration between estimating and scheduling. Once the individual element has been established within the estimate, it can be incorporated within the same structure to help facilitate the scheduling of that activity (work element). 19 2.1.2 Output Each work element within the estimate correlates to a task within the confines of the project schedule. Each task involves an effort and the passage of time to complete. Each task has a defined start, finish, and can be broken into sub-tasks. Each work element represents a scheduling item, and is a common denominator for collecting and organizing cost estimate data. The individual cost accounts that are developed for estimating an individual work element will become an integral part of an activity on the schedule. It is important for the estimator to develop a schedule of elements, or tasks, as well as the resources associated with them. The scheduler is then able to use these predetermined elements and resources as an individual item, or as a combined item on the schedule. The cash flow of the project is mentioned within this thesis and is recognized as an integral and important aspect of the project. There is more emphasis being placed on the control of costs as a function of time due to increasing project complexity. It is up to the estimator to mark the expected time when expenditures are incurred. Three types of project control are listed: 1. Cost Control: Actual cost compared to estimatedcost. 2. Schedule Control: Actual start and completion dates compared. 3. Production Control: The value of production units in place as compared to the value of production units planned to be in place. 20 Reports are to be processed to make it possible for an early detection of excessive expenses with regard to the cost status of the project. Timely information is a necessity to allow management ample opportunity to determine a new course of action. 2.1.3 Critique “An Integrated Model of Computer-Aided Cost Estimating/ Scheduling in Construction Management” concentrates on the integration process between estimating and scheduling. It becomes relevant to this research project by its discussion regarding: the work breakdown structure and, cash flow. The work breakdown structure is an effective way to determine the individual elements that make up a construction project. This thesis describes the work breakdown structure in terms of integrating estimating and scheduling. The same description for individual items of a construction project can be usefirl when integrating estimating and accounting. The idea for using the work breakdown structure is to have similar items for two disciplines. The cash flow of a project is described as an important aspect of a construction project. Cash flow is defined as 1) cost control, 2) schedule control, and 3) production control. The mentioned three items are described in terms of estimating and scheduling without regard to the accounting process. Theses concepts are accepted as being important, but will be described later within this research project within the context of estimating and 21 accounting. It is the belief of the author that by expanding the cash flow concepts mentioned above within the context of integration between estimating and accounting, the integration efficiency will be maximized. The time and capital spent developing an integrated system will have a more desired return regarding cash flow measuring and reporting. 2.2. Automated Interactive Cost Estimating Systems for Reinforced Concrete Building Structures. 2.2.1 Overview “Automated Interactive Cost Estimating Systems for Reinforced Concrete Building Structures” (Lee, 1992) determines that the traditional (manual) method of estimating is antiquated and has many limitations. The limitations include the waste of specialized skill and the lack of uniformity from one estimate to another. There are many estimating software programs available, but none that is able to help the designer determine detailed cost estimates during the design process. 2.2.2 Output There are three major problems that are addressed regarding the current estimating systems: 1. Lack of linkage between the cost estimating process and the design process. 2. Lack of incorporation of a construction decision process into a cost estimating system. 22 3. Lack of application of the construction process in the duration estimating. Cost is mentioned in this research effort as being one of the major stumbling blocks within the integrated system. The research efl‘ort contemplates linking the cost estimating process with the design process to help facilitate a detailed cost at the design stage. It is mentioned that it is impossible to get an accurate estimate within the design process because the estimate relies on a completed design. The cost estimate is described as being an effort that should be performed through both a construction decision process and an algorithmic (procedural) process, but many current systems do not consider the decision process. The procedural process relies on the quantification of construction resources, but by disregarding the decisional process, large inaccuracies of the estimate may be found. Construction decision making during cost estimating is very important, because it affects the unit cost of each cost element. Each method of a construction application has its own cost and capability, and the cost must be balanced with the capability. Under some circumstances, capability constraints may require a higher cost. An integrated and computerized system is stated as being most important when the project is of greater size. The estimators spend a large part of their time in performing some tasks that do not require any of their specialized knowledge. The estimator becomes overburdened with manual work that can be performed by less skilled employees. 23 2.2.3 Critique “Automated Interactive Cost Estimating Systems for Reinforced Concrete Building Structures” attacks the problems of integrating between cost estimating and design. The main point of interest and its correlation with the research effort of this paper is the performance of the cost estimate fiom the decision process through the procedural process. It is stated that the procedural process relies on the quantification of construction resources. Also, there may be large inaccuracies between the budgeted resources and actual resources. The proposed estimating system within this research provides detailed estimates of the quantity, cost, and duration automatically based on the available information at different stages of design. A detailed estimate should include all resources associated with any particular item that is being estimated. A project is broken into a set of tasks or activities, each having an identifiable quantity of work that must be performed for that task to be considered completed. Estimating is described as performing two main processes: quantity takeoff and costing. Quantity takeoff involves measuring from architectural and engineering drawings, and converting the measurements into cost data. In order to determine the cost to perform work, it is necessary to estimate the rate of production. If an estimate is available that uses the database of the design engineer, the estimator will provide a more accurate estimate. 24 2.3. Cost, Schedule, and Time Variances and Integration 2.3.1. Overview: “Cost, Schedule, and Time Variances and Integration” (Carr, 1993) demonstrates detailed schedule and cost control relationships at the activity/ cost account level using generic microcomputer software to budget, track, and control projects. Time variances are included to describe the difi‘erence between scheduled and actual times for an activity. Variances can be calculated and reported at difi‘erent levels of detail. Variance structures, as well as an incorporated budget from estimating into scheduling, can allow for integration of cost and schedule control for projects that share a common WBS. Control is defined within this paper as determining the variances between actual and targeted costs for the project(s). The target is the estimated cost, and the actual cost is what is performed in the field. For projects that share a common WBS between estimating and scheduling, it is possible to provide integrated cost and schedule control. This thesis focuses on the work package to provide information regarding the combination of individual construction elements and control of the project. 2.3.2. Output Cost control is described as basic managerial accounting. This thesis describes links among element schedule, cost, and time variables and variances to implement a more detailed integration process. Variances become usefirl if they are available early enough in 25 the construction process. Integration of data requires a single unit of measure that combines like items. Cost and schedule variances are therefore reported in dollars. Activities and cost accounts require a common measuring base as mentioned above. The basis used is the budgeted cost information. Schedule control depends on the resources that are used, whereas cost and schedule control depends on the measurement of the shared budgeted costs, resources, and quantities. 2.3.3. Critique Cost control and schedule control are important tools for managing projects. Cost and schedule performance share common variables on which an integrated View of cost, schedule, and time variances can be built if they share a common WBS. A cost schedule that performs for the accounting department should be considered when designing a cost schedule that is usefirl for both estimating and scheduling. The common measuring base that is needed for estimating and scheduling is just as useful for accounting. 2.4. Heavy Construction Estimates, with and without Computers 2.4.1. Overview: This article is written for the effort of helping and enhancing the preparation of heavy- construction bid estimation and also discusses the difference between manual and computer estimation. The points of interest within the discussion are the development of proper systems within manual estimating. If a construction company takes the time to 26 develop an organized manual estimating system, the systems are in place to firlly take advantage of the computerized estimating system. It is often stated that computers are only as good as the information that is placed into them; garbage in and garbage out. If the information entered into the computerized estimating system has been thoroughly examined and organized, then the computerized system has a better chance for success. 2.4.2. Output Failure of most estimating programs is due to a lack of recognition of the size and complexity of the undertaking, and the steps essential for the successful resolution of the problem. This failure is in conformity with other statements in the literature reporting the general lack of agreed guidelines and methodology for estimate preparation (Moselhi et al. (1991a, 1991b); Carr 1989). In addition to the lack of agreed guidelines is that failure may be due to the highly experience based nature of the estimation process and the inadequacy of traditional computerized techniques to replicate and/or aid the process in a holistic manner. This has resulted in estimation programs that are powerful in certain aspects, yet insuflicient to address all the elements of the estimation process. Most estimating programs start an estimate with a list of possible work tasks stored in a database, and then assign costs to work tasks relevant to the project. These costs are later compiled and assigned to relevant contract items, primarily manually, or at best indirectly through specialized cost codes. 27 In manual estimation, on the other hand, the estimator focuses mainly on the contract items and performs the necessary estimation work in direct link to them, enabling the establishment of their respective direct cost. The process is more direct and enables faster and simpler review of the estimate. 2.4.3. Critique: The author does question the fact that a suitable program may not be available at the time that the article was written for computerized estimating. Much of the negatives that were discussed in the article have to do with the established database that comes with most programs. It is up to the estimators to establish customized databases for their estimating program. Ifthe database that comes directly from the manufacturer is used, it will be limited for a specific company’s needs. It is mentioned in the article that the failure of most estimate programs is due to the lack of recognition of the size and complexity of the job and the steps essential for the successful resolution of the problem. Estimating is described in the article as a “highly experience-based nature.” This is interpreted to mean that the knowledge base is highly centralized between one, or a few people within the company. Only by experience has this knowledge been acquired, and if that person were to leave, the knowledge would leave. Manual estimating focuses on the individual contract items and consequently estimating is performed in direct link to the items. This process is viewed as more direct, but it is also much more time consuming. 28 Accounting is not mentioned in the article. The article explains that the estimating system is more complex as well as being rather haphazard in most companies today. In order to firlly maximize the information transfer between estimating and accounting, it is extremely important to first establish an organized and systematic approach to estimating. 2.5. Introducing New Process Technologies into Construction Companies 2.5. 1. Overview: “Introducing New Process Technologies into Construction Companies” states that technology and innovation are not considered important by the construction industry. The argument of the paper is that they are both very applicable as well as important to the industry. New technology is defined as something that has not been used before in a company’s normal operations. Innovation is defined as looking for, finding, and implementing a new technology to improve a company’s everyday performance. The paper then sets the guidelines for a construction company to successfirlly introduce new technologies. The construction industry is described as lagging behind other industries in relationship to taking advantage of new technology. Research and development account for only 4% of the annual construction expenditures in the United States. Without innovation and implementation of new technology, the industry is sacrificing improvements in safety, productivity, and cost effectiveness. 29 2.5.2. Output: A set of questions were developed to examine the conditions of case studies regarding the effective implementation of new technology. A process for implementation is proposed and applied for both small and large contractors. The question of how a company is to break away fi'om its traditional ways and implement new technology is answered by providing the contractor with a set of guidelines for the successful introduction of new process technology, and defining terminology. 1. Construction Technology: The combination of construction methods, construction resources, work tasks, and project influences for performing a construction operation. 2. Construction Innovation: The first use of technology within a construction firm. Innovation is increasingly being recognized as essential to the success of the industry. 3. New Technology: A product or process that a company has not previously used in its construction operation. A six step innovation process for an organization is given as the following: 1. 2. Agenda setting: the need for technology is defined. Matching: the need is considered along with the technology. Decision Making: senior management decides to adopt or reject the technology. Redefining/Restructuring: the technology and the company structure are modified to fit each other. 30 Clarifying: the relation between the technology and the organization are clearly defined, and the technology is put into regular use. Routinizing: the technology is made an element of the organization and its everyday activities. Five factors that influence the decision to adopt new technology are: 1. 2. Knowledge Persuasion Decision Implementation Confirmation Training of the employees is one of the most critical steps, and is one that should not be overlooked by the company. 2.5.3. Critique: New technology is an essential element for the firture success of most construction companies. “Introducing New Process Technologies into Construction Companies” shows that the construction industry lags far behind or moves at a slower rate than most other business in the area of adapting new technology. Improvements in new process technologies have become more affordable. Most construction companies operate on a small business platform. Price usually dictates if a new business practice is feasible or not. Computer technology has become affordable for even the smallest business platform. 31 This article takes the idea of expanding new technology within the construction industry by listing 1) definitions, 2) steps for the innovation process, and 3) factors that influence the decision process to adopt new technology. The three listings combined show the actual steps involved when considering new technology. These steps help to insure a successful implementation of new technology. 2.6. Conclusion Chapter two examined existing research pertaining to the topic of this research efl‘ort. Concepts, ideas, and quotes were used from these sources, as well as other sources. The research was reviewed and evaluated on its benefit and usefirhress to this research project. 32 Chapter 3 Planning Information Required for Estimation and Job Cost Integration The planning that is required in order to implement an integrated job cost-estimating information system is complex. The complete structure of the organization needs to be evaluated, paying specific attention to the estimating and accounting departments. The methods that are adopted when determining the cost of a project need to be systematic and repetitive for all projects. These methods also need to be carried over into the accounting department. When information is transferred between the estimating and accounting departments, the importance is placed on the information being incorporated into the accounting system. This is because the accounting department is more systematic than the estimating department. Rules and regulations are followed stringently within the accounting field. The estimating process for most construction companies is very independent of form or function, and is usually left up to the company, or individual estimator. The following sections define terms and recommendations that have been established to help standardize the flow of information within a construction company. These concepts have been useful when transferring data between the estimating and scheduling processes, as seen in Chapter two. 33 3 . 1. Organizational Breakdown Structure The Organizational Breakdown Structure (OBS) is how the company is organized. This can include both the main office, and the field personnel, as well as outside organizations that affect the company’s operations such as outside accounting firms, subcontractors, owners, architects and engineers (Figure 3.1). Many outside organizations will have people who operate on the site as a representative. A good example of this would be the owner’s representative, subcontractor foremen, and architect and engineering representatives. Within the organization, the construction company will provide a project manager, various job superintendents, and engineers who are responsible for either the whole job, or various aspects of work to be completed. The OBS is a hierarchical structure which dictates the level of responsibility for all parties involved in the project construction and completion. The lowest level of the OBS will be the labor force and/or subcontractors who are responsible for the individual levels of work. An example of an Organizational Breakdown Structure for the field aspect of a project and its various levels is shown in Figure 3.1 34 miner Project Manager 1’ I Engineer A/E I l l 1 Gammmmn Plumbing HVAC System Electrical System r34 r—J—J r—Tfi r—L'j DirectLabor SubComactor DirectLabor Sleontaztor DirectLabor SubCortrador DiredLabor Subcomator Figure 3.1 Organizational Breakdown Structure (Modified from Takeda, 1991) The organizational breakdown structure is an element of the business that needs to be considered when implementing an integrated estimating and job cost accounting system. A typical organizational structure for a construction company showing the hierarchical structure from the main office to the field personnel is shown in Figure 3.2 35 Office Manager Controller _ Estimator AceorntingDepartment EstimatingDepartmert I I Project Manager Project Manager Project Manager Projectt Projeth Project3 I l I J j I I I I Site Superintendent Project Engineer Site Superintendent Project Engineer Site Superintendant Project Engineer Projectt Projectt Project2 Project2 ProjectS Project3 Siteldrorers SiteLaborers StreLamrers Subcmtractus Subcrxtractors Srhoortractus Figure 3 .2 Main Office-Field Personnel (Modified from Takeda, 1991) Organizational Breakdown Structure The simplified depiction of the office-field OBS (Figure 3.2) shows the separation that is often found between the estimating and accounting departments. Sometimes a degree of shared information exists, but it is acquired through the production of traditional accounting reporting typically done at the end of the accounting period. The field personnel shown in figure 3.2 illustrate the flow of information from the office to the field, as well as the flow of information back from the field to the office. When considering the implementation of an integrated job cost/ estimating system, the generation of information from the field personnel needs to be evaluated. Much of the new system will rely upon the 36 timeliness and accuracy of information that is gathered from various field people, and how the information is sent back to the needed departments in the main office. Some companies have accounting people stationed on the job site which eliminates much of the information gathering problems that can be associated with a job cost accounting system. Although this practice is used by some companies, it is not the norm. Many of the construction companies in operation today either do not have the resources or the people available within the accounting department to have them set up on any particular job site. With this in mind, who will gather the information and how they will do it are critical components for the structuring of an integrated estimating/accounting system. The job cost accounting management system is not an elaborate system, but must rely on the personnel of the construction company for its success. The actual design of such a system is quite company dependent. No two companies will establish systems that are the same. The degree that resources are measured will be dependent on the degree of information that the company, and managers, believe is needed. Also, the OBS of the company will need to be evaluated and/or modified in order to take advantage of the flow of information from the field to the accounting and estimating departments and between the estimator and the accountant. Those individuals who will be relied upon for the success of the system, including estimators, accounting personnel, field personnel, job site manager, and superintendent, need to be part of the system design team. If it is a system that they do not believe in, it will not be a complete success. These individuals are the information gatherers, and are the most critical aspect of the system. 37 3 .2. Work Breakdown Structure The Work Breakdown Structure (WBS) is a system that allows a company to place a job or project into various cost accounts based on a sub-series of work packages. The whole project is divided into a series of tasks that need to be completed for the success of the project. It is common for a company to follow a uniform coding system for all jobs, but there may be a difference in the degree, or the extent that the individual tasks are recognized. Much of the difi‘erence may be due to the amount of detail that is necessitated due to the type of project and the amount of subcontracting that may be done for a specific job. Tasks are the items which constitute the construction of the project. Each project may be taken to the lowest level of detail that represents certain items of construction. For instance: the labor that is required to construct a section of a block wall, the mortar required for the section, and the blocks required. If the construction company is responsible for the labor (in house), then the degree, or level, of task may be taken down to the individual labor, equipment, and materials items. It is of great importance to have the level of information to its smallest degree to account for resources used. Ifthe job task is subcontracted out, the level of importance, or the degree of which the item is represented to the construction management company would be the wall section. The work package is considered to be the wall section, and this is the lowest level of concern that the company has for this particular item. Taking time to consider the amount of resources required to complete the work package is time and energy that does not need to 38 be expended. The subcontractor responsrble for the work may keep track of this information for its own company’s records and future use. The management company may be responsible for the materials, but not for labor. If this were the case, material would be the lowest level of detail needed within the work package. Tasks can be considered part of a hierarchical structure that constitute the construction of the project. The work breakdown structure includes the tasks taken to the level of usefirl importance for the construction firm. The project is the first level of detail in the WBS. The level of breakdown beneath the project level is completely determined by the current, needs of the construction company and/ or the project. A standard within the industry for estimating is to use the Construction Standards Institute (CSI) sixteen division breakdown as the work breakdown structure. If level one is the actual project, level two becomes the sixteen CSI divisions. Levels two and higher becomes a matter of choice and usefulness regarding the numbering requirements for the company. The work breakdown structure of a company is another item that needs to be developed, defined, and followed without deviation in order to establish consistency of tracking and defining tasks required for the proper completion of a project. The initial stage of use for the WBS is with the estimating department. The importance of the breakdown level is directly a result of obtaining a dollar value to construct the project. Ifa company is utilizing in-house labor to construct the facility, the level of detail will be increased. When many subcontractors will be used to construct the facility, a slightly less detailed level of 39 tasks will be required. The use of the WBS should not begin and end in the estimating department. A construction project is viewed as a hierarchy of work packages (Carr, 1991), and the elements that establish the work package need to be well thought out and kept track of throughout the whole construction process. It makes sense that a company should establish as many systems to run similar information using the same work packages for consistent measurement of progress and insuring a high degree of accuracy for comparing budgeted and actual information. The importance of establishing an integrated estimating and scheduling system has gathered much attention through recent research and publishing (Carr, 1991; Syal, 1991). The main focus of much of the research has been in establishing a defined flow of information through the whole process. Projects that are using shared cost and schedule controls share a common work breakdown structure and therefore provide integrated cost, and schedule control (Carr, 1991). The elements of a work package can be measured when a common WBS is used providing element control, as well as project control. The same can be said for integrating estimating and accounting. By creating similar task measurement between the two departments, project control can be enhanced through accurate tracking of budgeted and actual costs of construction. The task measurement on the estimating side has already been established by the estimator in the form of the project estimate. The task measurement provided by the estimator becomes the budget that all costs will be compared to generating variances between the actual and the budget. The elements for costs will be organized using the work 40 breakdown structure. The information flow between the accounting and estimating departments will originally be established via the cost estimate, or original budget for the project. The estimating department may also have to adjust its practices to accommodate the accounting department. This system can be generated by developing cost accounts that correspond to the lowest level of the work breakdown structure of the estimate. The cost accounts need to follow similar guidelines of the WBS to accurately measure the variances. The boundaries between the elements need to be well defined. It is not required to have an established level of detail for all projects, but the level of details must remain consistent for a particular job between estimating and accounting. A well defined scope of work is necessary for each element to be measured efficiently and accurately. 3.3. Accounting Accounting in the construction industry helps management control its costs and utilize its working capital (Coombs, 1995). A construction company needs to be aware of the resources that make up a construction project. In addition, the company needs to mobilize the resources in order to complete the work, and demobilize the resources away fiom the construction site upon completion. Traditional accounting methods need to be used in order to conform to laws governing the use of such methods. Traditional accounting methods serve well in providing information to outside parties, but whether the company utilizes the information to its full potential is worth questioning or looking at closely. The flow of accounting information is limited to the accounting department. Data collection and processing is being used solely for traditional accounting reporting, and not efl‘ectively 41 or efliciently utilized as a management information and decision making tool. Job cost accounting procedures provide the additional tools for these purposes. 3 .4. Financial Accounting Financial accounting measures the income of a company and determines its net worth via the income statement and measures the worth via the balance sheet. Strict laws have been established through time that place complicated and mandatory application practices upon the accounting field. The structure that is followed needs to be adhered to in order to maintain uniformity, as well as to have consistent measurement over time. Journals and ledgers are used to measure and keep track of a wide range of financial transaction information (Fig. 3.3)- 3.4. 1. Journals The journals in the financial accounting system consist of the accounts receivable, accounts payable, and payroll journals. The accounts payable journal keeps track of vendor information, subcontractor insurance, invoices, and checks. The payroll journal lists the employee earnings, employee deductions, and employee taxes. The accounts receivable journal keeps tabs on what is owed to the company by outside sources. 3.4.2. General Ledger The purpose of an accounting system is to group operational transactions so that an accurate judgment of the financial condition of a company can be evaluated. The general ledger serves as a summarization of all transactions of a company (Lucas, 1984). Every 42 accounting transaction entering into the system must pass through a journal and the general ledger. This allows the system to control both duplication and omissions of specific transactions. The purpose of the accounting cycle is to give a summarization of financial information as financial statements at the end of the accounting cycle. Transactions are entered initially in journals, then are summarized, or posted, into ledgers. The ledger summarizes all financial entries that have been entered in specific accounts. Debits and credits of an account are summarized and posted to the ledger. Ledgers are established within a company for each account. All of the ledgers combined are what define the company’s general ledger (Adrian, 1979). Figure 3.3 shows the flow of information through financial accounting practices. Transactions enter the system and are posted to journals. Journals are then posted to the general ledger where all transactions are summarized. Summarization of the general ledger at the end of the accounting period results in cash flow information including the balance sheet and the income statements for the business. 43 Posting Balancin Income Statement . G eneral ‘ Transaction Journals L edger Journals General Ledger 1. Accounts Payable o Debits and Credits 0 Vendor Information 0 Accounts 0 Subcontractor Insurance 0 Base Accounts/Prefixes O O O O O . Invoices Multiple Entities Checks Balances/Activities Accounting Periods 2. Payroll Budgets by period 0 Earnings (quarter/year) 0 Deductions 0 Trial Balances 0 Taxes 0 Current and YTD Ledgers 0 Government Reports Figure 3.3 Financial Accounting Model Bertolini, 1998 3.5. Job Cost Accounting System A ccounting Financial Reporting Paying Employees Vendor lssucs Government Reporting Collecting for Services Cash Management Bonding Reporting One of the largest and most complicated accounting problems faced by construction companies is the recording of costs. The recording of costs is done simply by the accounting department. The recording of costs is done with great accuracy and precision for the simplest purpose of recording information for taxes and government requirements. Much is being invested into the normal operation of a company by tracking this financial information based on a tirneline that has nothing to do with the tirneline of the project that the information is representing. The accounting cycle determined by the company representatives prior to the actualization of the first project procured by the company is the dictating factor for the gathering and processing of financial information. The problem 44 is that these costs may be determined after the projects have been completed. Financial and resource reports are not instituted when they can have the greatest effect on management decisions regarding the construction of the proj ect(s). This is the premise on which a job cost system operates and the problem that it attempts to alleviate. Instead of developing financial reports solely for investors, government, and banks at the end of a predetermined accounting cycle, reports will be developed that help project management make decisions regarding the project. The overall objective of the job cost system is to show the project expenses as they occur and disburse them to the appropriate work package (sub-element) of the project (Halpin, 1985). Decisions can then be made to help adjust cost over-runs and help preserve the desired profit margin. The job cost accounting system serves two purposes. The first is to monitor and control costs compared to the original budgeted amount. The second is to collect information for future estimates. The system the company establishes can be very complex or quite simple. The system depends on the needs of the company and what is required for managerial decision making. Choosing the proper system and the degree of complexity is one of the most important aspects, and can greatly affect the success of the system. Detailed information is required to be collected from the field, and the collection timeliness is essential in order for the overall success of the system. This information will be processed according to the timeline of the project(s) under construction. Information processed quickly will allow data to be analyzed and acted upon in a sufficient manner as to head off future problems such as cost over-runs. 45 Figure 3 .4 demonstrates the flow of information through the job cost accounting system. The estimate of a project is entered through cost accounts that correlate with the individual cost codes. The cost codes correlate with each individual element and resource required for estimating the project. These budgeted costs are compared with the actual costs of construction. Reports are generated as managerial decision making reports and historical data information for future estimates. 46 as... 1.. Air... |_- Budget Estimate Cost Data Retained for Historical Data Figure 3.4 between Actual Costs frun brim Field Reports Management Reports Information Flow through Job Cost Accounting Bertolini, 1998 Money is already being spent to gather pertinent project information for financial accounting. The accounting system needs to be adjusted to maximize the use of the information already being generated, as well as additional resource information. The information should be collected and generated into practical decision making data concurrent to the project time frame, as well as to the accounting cycle. The objective of the job cost system is to keep track of the project financial information in a timely fashion. The information then can be used to implement changes and verify the accuracy of the budgeted cost of the job (estimate). Verifying the accuracy of the budget 47 is done through establishing control over accounts payable, labor costs, material costs, and subcontracted costs (Coombs, 1995). Because most contractors view themselves as true entrepreneurial spirits, they look negatively upon a structured management approach (Coombs, 1995). The accounting system needs to have separate accounts that identify labor, equipment, materials, and overhead costs. Tracking of these resources becomes an important management challenge for the contractor. This challenge can prove to save two to four percent on any given job if it is systematically implemented and followed (Coombs, 1995). One way that a company can implement the job cost system and begin to track the information flow is by developing cost codes that are used by both the estimator and the accountant. 3.6. Cost Accounting Codes The estimate is the initial document that is used for the job cost system, and in particular, it provides the cost accounts for the job cost system. The cost accounts are set up to insure that all of the items of work and resources have been accounted for throughout the construction process. As the project is under construction, all of the costs need to be recorded in the cost accounts in a timely manner in order for the system to be usefiil. The costs accounts will determine if the estimated costs were accurate (Coombs, 1995). The cost accounts serve as the layout for how the project will be measured throughout the construction process. The construction company must have accounts established that are able to provide timely warning to cost variations and over-runs. The accounts should be developed around the time flame of the project, and the complexity should not interfere 48 with the timely gathering of information and reporting of variances to management (Halpin, 1985). Reports are processed during construction that analyze the estimated costs and compare them with the actual costs to forecast if the project is within budget. Since the profit of a project is a relatively small amount compared to all of the costs for the actual construction, it is extremely relevant and important to know where variances have occurred, which division and/or element, and make adjustments to the project at an early stage to offset any cost over—runs. Cost accounts serve another purpose for the construction company. Once the project has been completed, and all of the budgeted costs have been compared to the actual costs via the cost accounts, they serve as historical data for firture estimates. Accounting by nature is the measure of-historic data, or that which has already occurred. A transaction takes place and is then recorded in specific ledgers that have been established by the company. Financial accounting, simply stated, organizes the information in such a way that is required by government standards. The final reports that are developed after the accounting period has ended are organized to report income (income statement) and profitability (balance sheet). This information is then made available to interested parties such as investors and the government in a standardized and uniform way. The final responsibility of the financial accounting information is in the preparation of periodic balance sheets, and statements of income. The obvious point is; how can this same information become more useful to the company. The information needsto be used as historical information for the estimating department, and as historical information for managerial decision making reports- Estimators find that the information provided by 49 traditional financial accounting methods do not provide proper historic information (Oswald, 1984). The accounts that are established in financial accounting methods are set up to conform to the processes required for the financial reports. The flow of information does not correlate with the budget because the accounting and estimating departments are not sharing the same cost accounts, and they are not sharing the same work breakdown structure. A company must evaluate its organization breakdown structure and determine how the estimating and accounting departments may better share the information. The cost accounts should be matched per job(s) to represent the same key elements through the use of the work breakdown structure. The construction industry has been slow to implement integrated management systems, though such systems can help prevent major cost overruns. Improper management controls established within a company affect management planning and control. Reasons for the variances between the cost estimate and actual costs include: (1) lack of planned information systems, (2) poor correlation of work definitions, (3) improper control of schedules and cost segregation, and (4) inaccurate cost allocation methods (Coombs, 1995) 3.7. Job Cost Reports Various job cost reports are available to enable management decisions regarding the accuracy of the initial budget for a construction job. The job cost reports are those that offer increased information to the managers of a construction company. The information reported is above and beyond what is reported via financial accounting statements. 50 The jOb cost report is one of the main control reports which measures how each job is doing. A comparison with the actual construction cost is made to determine the accuracy of the initial budget for construction. Change orders should reflect a change to both the budget and actual costs. The information is gathered through invoices that are currently being sent to the accounting department for work, materials, and labor for work on a particular job (Pansza, 1988). The timeliness of this information, as well as all other job cost reports, is of the utmost importance. In areas where information is not available, estimated costs are acceptable. The estimated costs need to be updated when the actual costs become certain. The absolute accuracy is of secondary importance to the timeliness of the information. The ability to react to cost over-runs and implement managerial changes is the primary purpose of the job cost system. The job cost report should be made available to management on a weekly basis. The completed job’s report gives information regarding costs for each job and should be conducted during the reporting month. The costs are broken down by the sixteen division breakdown system (C SI), and give information regarding the contract amounts, in total, for each job. Variances between the actual and budgeted cost amounts are shown for all completed jobs (Pansza, 1988). This information is then transferred to the estimating department as historical information. This information will be used as a tool to better estimate future projects. 51 The job cost system stands by itself, separate fiom the financial accounting system and keeps track of costs using the sixteen CSI divisions by job. It is tied to the financial accounting system through the general ledger system. This allows for the system to be up and running quite easily because the current system is already in use for the general ledger system. The job cost accounting system also allows for the system to be up and running quite easily because the current system is already in use for financial accounting. The total costs for the period are posted to the general ledger in the same way that manufacturing posts the Work in Process account at the end of the accounting period. 3.8. Cost Estimates Cost estimating has been defined as the process of predicting the project costs and resources associated with a project (Lee, 1992). Cost estimates are used extensively by all companies associated with a construction project. The owner determines the feasibility of a project through initial cost analysis and estimating. The architects utilize a construction estimate to evaluate project alterations and changes. The company attempting to procure a job to construct uses estimating to develop a comprehensive cost for bidding. After procurement, the estimate is used for the budgeting of the project. One inherent flaw in the cost estimating process is the lack of incorporating construction decision processes into the construction estimating system (Lee, 1992). If a cost estimating system is linked with a job cost accounting system and the information flow is set up to measure detailed resource budgets and actual costs, and to compare variances, then estimators can find the impact of variances and react quickly during the construction process- 52 The estimating process is one which has both a personal process approach as well as a company procedural approach. Individual estimators may have an established system that they personally employ in order to arrive at budgeted costs for a project. This personal process system may have been developed over years of experience and may not be structurally organized anywhere except with the individual estimator. As stated earlier, accounting principles have been developed over a long history of practice. The purpose of financial accounting is to provide a framework in which financial information may be presented (Mott, 1981). The purpose of estimating is to predict a final cost at which a project will be constructed. Personal experiences will in large part play a significant role in how the breakdown of costs will be determined and costed. Company procedural approaches attempt to provide a degree of uniformity to the estimating process for all jobs. The similarity will make the information more meaningful and provide more accurate information in the firture. Company procedures will not designate specific starting points for the estimator, but will establish a final framework for how the estimate is to be presented in its final form. These procedural standards allows the estimator to personally decide on the strategy for determining individual costs for the project. 3.9. The Estimating Process The estimating process is one in which an established procedure for determining the cost to construct is included in the process. By analyzing some of the inherent problems 53 associated with a profession that lacks general uniformity, the following sections show a suggested procedure to consider for determining a project estimate. Figure 3.5 provides a template an estimator should consider when determining the cost estimate for a project. 3.9.1. Detailed Study of the Plans and Specs The estimating team will need to thoroughly evaluate the project plans and specifications. The evaluation process is shown in the second level of the cost estimating model (figure 3.5). Attention to detail is one of the most hportant aspects of this phase of the estimating process. All aspects of the building process needs to be considered and evaluated. At this stage of the estimating process, it is important to consider if a given project is one that a construction company wants to attempt. 3.9.2. Divide Plans into Preliminary Building Systems Dividing the plans into preliminary building systems provides the estimator with an initial breakdown of the building process. An initial analysis is presented, not a detailed work breakdown structure. By placing the project into categories, the estimator can determine the complexity of the project while gaining insight regarding resources and time fiames. 3.9-3. Develop Work Categories and WBS The building systems are broken down into their work breakdown structures, and firrther into work elements. For divisions which are to be subcontracted entirely (including labor, equipment, and materials) the level of detail is minimized. Work items and the individual resources associated with the items are determined by the estimating team at this time. 54 3.9.4. Collect Costs Once the work item levels are determined, along with the associated level of resource measurement, the cost is associated with each item. Subcontractors that will be required to perform work are summoned, and their costs are tallied. 3.9.5. Final Estimate The itemized costs are added and reviewed at the time of the final estimate. The estimated costs and the work breakdown structure should be reviewed thoroughly by different company officials to ensure accuracy and verify that no items were missed or miss- represented. 55 [Prepare Plans and Spewl Study Details of Plans and Specs 1 Divide plans into preliminary bldg systems 1 Develop work catergories and determine level of W88 1 Collect subs, suppliers and estimates [ Compute Quantities J l Calculate Costs of Categories and Work Items l Calculate Overhead and Profit [Determine Final Estimatel Figure 3.5 Cost Estimating Model Bertolini, 1998 (Modified from Appau, 1995) 56 3.10. Integrating Job Cost Accounting and Estimating The integration of the job cost accounting system and estimating systems is an important aspect to consider when determining (1) the tracking of the information flow for project costs through a construction company, and (2) the planning and control of cash circulating through a construction company. Cash flow is an important aspect of a construction company because of the complex nature of the industry. The complexities include weather, economic status, variances between individual projects, and the large dollar value of the projects. These items represent a unique challenge to the industry in the form of planning and managing the flow of cash (Adrian, 1979). 3.1 1. Construction Project Planning The life-cycle of a facility consists of several phases that measure particular milestones of the facility. Four phases that mark significant points throughout the life-cycle include: (1) Project feasibility phase, (2) project development and delivery phase, (3) facility management phase, and (4) the demolition and disposal phase (Syal, 1991). The project planning stage is considered to run from the start of the design to the completion of construction. This stage of the facilities life-cycle is considered the project development and delivery phase. It is within this stage, or time frame, that the construction company is responsible for the cost budget, the construction, and the timely completion and delivery of the project to the owner(s)- Figure 3.6 demonstrates the construction project planning stage and the point at which the construction project planning takes place. Design decisions and construction decisions are 57 made at this point. Decisions regarding cost estimating are made after the design stage and prior to execution. Project Demolition Project Development Facility and Feasibility and Management Disposal Phase Delevery Phase Phase Phase Conceptual Prelim- Detailed Desigr — Design _ Design Design Decisions Procure- Onsite Execution mart Planning Construction Decisions Figure 3.6 Construction Project Planning Stage Syal, 1991 58 The project and delivery phase of the construction process is one of the more critical areas where comprehensive project planning is shown to increase profitability and timely completion of a project. One section of the project planning and delivery phase is the construction project planning group. This section takes over after the design of the facility has been completed by the architect and engineer and prior to the actual construction. This is the area where a construction team has the opportunity to plan for the successful completion of the building project. The construction team has the opportunity to plan for cost, time, and performance parameters (Syal, 1991), as well as to define the flow of information as it will travel through the estimating to the accounting departments. A construction team project plan should consist of the preparation of a cost-flow analysis of cash, both received and disbursed through the construction of the project. The construction company must know when various activities are to be performed, when those services will be paid for, and when cash will be received by the owner (Adrian, 197 9). Project planning for the flow of activities and cash through the system entail determining the activities prior to the procurement of the project. This planning is done during the estimating process (figure 3.7). The estimator needs to determine the cost breakdown of the individual items that will make up the project as a whole. Figure 3.7 highlights the construction team project planning phase, and lists the importance of determining activities and cost codes prior to the start of construction. 59 Project Development and Delivery Phase Design Phase Team Assign Const. Construction Team Project Planning Determine Determine Activities Cost Codes Figure 3.7 Construction Project Planning Model Bertolini, 1998 (Modified from Syal, 1991) A well organized company will have systems in place that will assist the construction company’s management team in the completion of the project both on time, and within the determined budget of construction. It is common for a construction firm to have a backlog of work, but not have a clear understanding of whether or not a profit is being realized on a current project under 60 construction. Construction companies often are performing work while keeping a project within budget, but fail to know the current situation of the cash flow through the company. Success is often equated with the volume of work in which a firm is currently involved. The accounting system can often aggrevate this troublesome situation. The accounting journals are usually set up to include transactions from current and past projects with no distinction between the two. The evolved scientific approach of standardized accounting practices causes unique problems that a construction firm will face. The industry has a high degree of unique characteristics that prevent a complete systematic approach to the measurement of the cash flow through a company (Adrian, 1979). The implementation of an integrated job cost system and estimating system that allows the tracking of the flow of cash and information relating to job costs, both budgeted and current, will go a long way in reducing the information flow problems of a construction company. Establishing a job cost system that is integrated with the estimating department is the initial stage for attempting to truly measure the variances between the budgeted job cost and the actual job cost. Implementing this system will allow for measurement to take place on quite a different scale than traditional accounting. Instead of gearing the system around the time frame of the accounting cycle, the reports should be run at useful intervals for project review. Measurement is the first stage of taking action. Becoming aware of problems and potential problems allows the user(s) to conceptualize what is currently taking place, and what action is needed to help rectify, or eliminate the adverse condition. The information that will be produced through the job cost system may not be complete. That is, some estimates of the costs currently under construction may need to be made. Estimating costs is not a short coming of the system, but a proactive 61 attempt to establish costs for items currently under construction to become aware of the possible variances between budget and actual costs. By determining an estimate prior to work being completed, changes can be instituted at a time that is most appropriate; before all the actual costs for the particular item have been completed. 3.12. Cash Cycle of a Construction Company A typical construction company usually has more than one project underway at any given time. The accounting systems established measure the money(s) coming into the system and the money(s) going out of the system. Journals are established in order to measure certain types of transactions. Accounts payable measures money that is leaving the company for material billings, invoices for work completed (subcontractors), and other costs to operate the business. Accounts Receivable journal measures the cash received by the company through billings. The point of interest for the accounting department, and the company, is that there is more money coming into the system than what is leaving the system (figure 3.8). 62 Starting Cash/Reven ue Accounts Payable (-) Material Other Bills (-) Labor (~) Costs (-) Work in Progress (-) and (+) Accounts Receivable (+) Cash Billings (+) Received (+) Figure 3.8 The Cash Cycle of a Construction Firm Bertolini, 1998 (Modified fiom Adrian, 1979) The mistake that is often made in a construction company is not setting up a system that measures the costs of individual projects. The variances between the budgeted amount and the actual cost of construction is not determined until after the project is completed and the overall costs are added and compared to the budget (estimate). For a financial accounting system, this practice is acceptable. When considering the time fiame that decisions need to be made for individual projects while under construction, this practice is unacceptable. Valuable information which can serve the management team for decision 63 making during the construction of a project is being underutilized through normal accounting procedures. Other financial concerns that can affect the overall balance of a construction company’s cash flow include assets and liabilities. The purchasing of land can increase the amount of assets and liabilities that a company shows on its books. Also, the purchase and maintenance of equipment, including vehicles and equipment, can also increase the company’s assets and liabilities. The selling of both land and equipment may boost a company’s financial statements in the asset column for cash. When taking all of these items, as well as other possible alterations of indirect project expenses and assets, the “bottom line” of a construction company’s financial statement can lead to incorrect assumptions regarding the profitability of one or all of the projects under construction for any particular accounting period. One thing to consider is that the work in progress is relatively easy to measure and keep track of in a construction company compared to a manufacturing company. Where a manufacturing company may produce a high quantity of ‘Vvidgets” in a given accounting period, it is extremely difficult to itemize each individual work in progress and determine managerial information. Although a construction company may have a number of projects under construction in a given period, it is usually a number which is both readily known and easily measured. In a perfect world, a construction company would not pay its suppliers and labor costs for construction until the company had been paid for its work. The time fiame in which a construction firm pays for costs incurred and the time in which it receives its money can be 64 significant because of retainage clauses in the contract between the contractor and the owner. Therefore, it can be said that profits from a completed project may be used to pay contractors and suppliers for a project under construction. Without a cost control system, it becomes quite difficult to distinguish between loss and profits for a number of project when a company has multiple projects. 3.13. Integrated Approach to Estimating and Job Costing Project estimating is predicting the cost for a one of a kind item. In project estimating a key concern is the long range impact that the project can have on the financial statements of a company (Oswald, 1984). There are many resources that are required to firlfill a contract for the construction of a facility. As mentioned earlier, a company may need to outlay capital up front to pay for supplies, labor, and subcontractors before receiving payments from the owner. Coupled together, resources and capital represent a high degree of volatility for a company which is unable to manage its cash flow correctly. Resource allocation is determined by the estimator. The estimator determines the subdivision of a large process into smaller items which are less complex and more manageable. The estimate is usually broken down into the fifth level of the work breakdown structure. This level is considered sufficient to appropriate the proper costs to the individual resources required to complete the work. It may be adequate to break the project down to a lesser degree. Ifthis is the case, outsourcing for material and labor may be necessary. Lump sum bids received by subcontractors may include labor and materials. 65 This would make it unnecessary for the estimator to determine labor and material. On the other hand, a higher degree of breakdown may be required if work was done in house. Finally, cost codes are determined at the lowest level of the work breakdown structure. The cost codes arethen implemented into the accounting system to serve as the original budget of the project. A certain amount of data is required for an estimator to perform a proper estimate. Subcontractors will provide the estimator with costs associated with certain work packages, or items. Vendors will provide cost information for supplies required by the plans. Company information is needed to determine overhead costs associated with all projects, and overhead costs associated with the particular job being bid. Lastly, historical information is required for projects of a similar nature. This is an area that all would agree is important, but a high degree of organization is required to receive accurate historical data. The use of historical information allows the estimator to determine areas that had been misappropriated in past estimates, and reasons for particular discrepancies between actual and budgeted amounts. This information can help eliminate potential over-runs in the future and allow a more accurate assessment of the costs associated with the project being currently estimated. Actual costs for the project need to be measured against the budget throughout the construction process. Systems need to be established that allow for the timely gathering, reporting and processing of the actual information. Most companies run into difficulty in 66 this area. Timeliness is the essence of a successful project. One can argue that the profitability is also critical, but timeliness is the main measure of success. The owner is less concerned about whether or not the contractor made a profit, and more concerned with the delivery of the facility to its useful purpose. The gathering of actual cost information takes place by all contractors for every project. At one point or another, a contractor is well aware of how much, if any, profit was made on any given project. The concept of timeliness is what sets a functioning job cost system apart from a standard cost tracking system. The main point in question is whether the information will be made available at a time when it can be the most useful is the main point in question. The systems needed in order to sufficiently utilize the cost information during construction are shown in the estimating-job cost integration model (figure 3 .9). Cost data are received directly from the field and compared to the original budget which is set up as cost accounts. Field reports serve as the main provider of the information fi'om the field. As stated, it is critical that the individuals in the field are part of the system design team and fully understand the importance of this information. Without their participation, the system is just a shell that will not accomplish the stated goal. Figure 3.9 models both the job cost system and the estimating system. The model tracks the flow of information prior to and during construction. Prior to construction, information from the estimate is shown as input into the job cost system as cost accounts. 67 i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i . .J i ' Job Cost System Cost Data Field Reports 1 j Actual Costs ‘— From Field ‘— and Personnel 3 r . J b Cost I lgeports Reconcile Budget Costs i JOB i l 16 CSI divisions i Management Activities 1 Resources 1 i Variances Cost Accounts i_ _ ......................... _ _________________________________ Estimate 5 l l l —| Historic Vendors and Company S bcon Information Suppliers Information 11 tractors 1 Cost Breakdown Plans and Specs Estimating System Figure 3 .9 Estimating-J ob Cost Integration Model Bertolini, 1998 All of the information that helps to determine the estimate are listed below the estimate box in the model. Information from the job cost system enters the estimating system as 68 variances. Actual costs are reconciled with the budgeted amounts within the job cost system which are then used as historic information for the next project. A job cost ledger is needed to input costs from the field. The job cost ledger will accept the costing information that has already been established through the cost accounts. Information required fiom the field will include timecards that determine the amount of labor for a particular job, material invoices that give detailed cost information for materials provided by suppliers for the job, and other direct labor expenses. Other expenses may include some or additional cost information. Subcontractor billing for items, equipment expenses, job site trailer and management, and applied overhead for the project may be data that are collected from the field. Job cost accounting procedures benefit those companies which produce many types of products, each being unique in some shape or form. In many cases, only one of any particular type of product is being made (Adrian, 1979). The general ledger system for any two construction companies may be vastly different so the actual layout of the system will not be covered. The purpose of the ledger is to list the date of the transaction, a description of the transaction, labor, material, subcontract, and miscellaneous expenses. Job cost accounting procedures established in construction companies come in two forms: those that are maintained manually, and those that operate on a company’s computer system. Regardless of which type of system is used, the main firnctions of the system is to identify all the project’s direct costs, and apply the indirect costs to the project. The key 69 to profitability is that all the costs associated with the project should be allocated in a timely fashion so decisions can be made when confronted with variances. The estimator is able to do more than establish the overall cost of the project under the job cost system. By analyzing the historical information, the estimator is able to determine standards by which work should be calculated for firture project estimates. The data from previous jobs shows the variances and also breaks down the resource consumption to the level of the established cost codes. Construction methods may be one of the specifications that the estimator gathers from a previous job. The standards established are targets which should be readily accomplished by the construction team. The reconciled difference between the actual and the budgeted information is transferred to be used in the estimating procedures for a firture project. This information will be used along with the subcontractor bid, the vendors and suppliers information, as well as the company indirect information. The actual cost information will be directed to the financial accounting department as well as the job cost system. The data in the financial department will be processed traditionally .L‘ L to determine the financial reports normally associated with the .. lug/construction industry. 70 7,. Fly 3.14 Estimating-Job Cost-Financial Accounting The integrated Estimating-Job Cost-Financial Accounting model (Figure 3.10) includes the integration process for the information model by connecting the job cost level with the financial accounting level. With the addition of the financial accounting phase, the actual costs that are generated in the field affect both the job cost and financial accounting phases. Note that the financial accounting phase is not affected at all by the job cost phase. It is completely independent of the whole information system except for the actual costs. These costs provide input that are necessary for the balance sheet and income statements. Figure 3.10 shows the necessary flow of information in order to have an integrated system providing accurate information in the estimating, job cost, and financial accounting phases. 71 ...................................................................................... BudgetCosts JOB . l6CSIDivisicns i Fr RGPGTS" Activities Reoarciled Actual CostData ddand Costs fi'omField B el JobCost Reports : ........................................ . t . ...................................... ___________________________ ———l BalanoeSheet """""""""""""""""""""""""""""""""""""" Iialilities Balance . Assets 41511th I I T 1 I Incrme :i NetWath Statanen Subomtractas Vendors and Company Histaic :3 t T Suppliers Infamation Information ‘1‘ + ..................................... T FmandalAccamtingSystem CostBreekdown PlansandSpecs """""""""" EgSystem Figure3.10 Integrated Estimating-Job Cost-Financial Accounting Model Bertolini, 1998 Computer integration is the next step that needs to be accomplished now that the flow of information has been defined. Chapter four takes a current software program and demonstrates the level of company knowledge that is necessary when developing the 72 information system with available software. The demonstration shows how modeling can effectively and efficiently aid a company by providing the blueprints for the specific structure of the information system required for an individual company. 73 Chapter 4 Set up and Functioning of a Computer Based Job Cost Accounting System 4.1. Introduction This chapter presents a comprehensive set—up example for an integrated computer job cost accounting and construction estimating system. Timberline Gold Accounting software is the commercially available product that was used for the purpose of this research project. The first section represents the set up for the job cost module. The set up covers the establishment of a company in the Timberline system, and the parameters that are required for it. The next section establishes an estimate using Timberline Extended Estimating software. A work package estimate is created, then integrated into the job cost module. Once the estimate is integrated, it can be used as the budget and used in job cost reports. 4.2. Setting up Timberline Accounting The Timberline Gold Accounting system is a software package that allows a construction company to establish a system that will be useful as a management tool. It is important that a system is established that will meet the company’s current and firture needs. Parameters are established and decided upon throughout the company setup. Two key 74 factors in effective use of the software package are taking enough time to plan for the implementation of the new system and training the staff for operating the system. 4.3. Company Set-Up in the Timberline Gold Accounting System There are certain decisions that need to be made when setting up the company parameters within the Timberline Gold system. 4.3.1. Irreversible decisions within the general ledger Decisions will need to be made to describe how the master file is created. These decisions are considered irreversible. Within the general ledger, the irreversible decisions are those that determine the amount of prefixes, and the base accounts, fiscal controls, and balance sheet information. Prefixes: Prefixes determine the initial numbering sequence of the account numbering system. The number of prefixes utilized is determined by the company’s current and firture needs. Considerations that are essential in determining the number of prefixes are how many entities are within the company’s umbrella, the amount of partnerships for the entities, and if there will be additional fiscal entities in the future . Prefix A, B, and C are allowed in the Timberline Gold system. The example that will be used within this report are prefixes A and B. Prefix A will be that of the Company and will have a size of 2 digits. Prefix B will be that of Division, and will also have a size of 2 digits. For example: Company prefix will be set at 10, and Division 10 (IO-10) will be for commercial construction, and Division 20 (10-20) will be for residential construction. Other examples may include: Prefix A = Company, Prefix B = State, and 75 Prefix C = Subdivision. Base Accounts: Base accounts are the identification numbers for the accounting structure. As a transaction enters the system, it is required to be processed through one of the ledgers, and/or one of the ledger accounts. This report will utilize the general ledger, and the job cost module. Typical accounts within the general ledger include: cash, accounts payable and receivable, work in progress, and retainage accounts. By establishing the structure of the base accounts, the sequence is being prescribed within the master file, and will be unable to be changed once the system is established and running. The base account will follow the prefix. For example: [0-] 0-1030 can be defined as: CompanyLevel— Commercial Division-Accounts Receivable. Fiscal Controls: .The information pertaining to the fiscal period(s) that are established for a company is called the fiscal controls. The most important aspects regarding fiscal controls are the period ending date and the fiscal ending date. Once these items are established in the system, they cannot be adjusted or modified. Balance Sheet Controls: The balance sheet controls are established early in the system development. These controls establish at which level the balance sheet is determined. This is in direct relationship to the level of Prefix establishment. For our example, we are setting up a company which will have two divisions; commercial and residential construction. We can set up our balance sheet level to be either determined at the company level, or have separate balance sheets developed for both the commercial and the residential division. Again, these controls can not be modified or changed once the system is in operation. 76 4.3.2. Irreversible Decisions within the Job Cost Module Decisions that are established at the inception of the job cost system and are not modified for the life of the system within the job cost module include: job format, phase format, categories, and the billing level. Once these items have been designated and the master file is created, any changes of the irreversible decisions will cause the system to be unable to recognize earlier data that have been used by the system (transactions). Job Format: The job format is used to develop the job numbering system that will be used throughout the system. Each job within the system will be labeled by its number. It is possible to establish a one number system that may be adequate for some construction companies. Many companies may find it useful to establish a multi-numbering system. The importance of the job cost system'is, in large part, the ability to create and run management reports for individual jobs. How the job numbering system is established will enhance this ability by being able to identify many different jobs. Identifying different jobs can be done by making the job number the “key” in the numbering system. For example, if a job number is one number (XXXXX), the only “key” is the job number itself. But, if the job number system uses a multi-numbering system where the first two digits represent the year of the inception of the job, and the second set of digits represents the job number within that year (XX-XXX), there is more versatility regarding report groupings. For instance, reports can be called up for all jobs performed in a given year. Also, individual jobs may be called up independently. The whole multi-number of the job number remains the “main key”, while the first and second set of digits can represent an “alternate key” 77 that can be used to generate specific job reports. The job number may be established to include as many as three sections- Phase Format: The phase structure is an irreversible decision that will dictate the structure of the individual phases within the system. The model in this example will use the CSI divisional breakdown. Each phase will be separated by a hyphen, and followed by the designation number within that phase. For example, the concrete division is designated by the number three within the CSI format. The Timberline database that is being used designates a five digit numeric system for packages within the divisions. Concrete wall forms use the numbering system of 11400. Therefore, the numbering system in this model will be establishedwithin the job cost module as 03-11400: Concrete wall forms. As mentioned in the Job Format section, the complete number represents the main key, while both the 3 and 11400 represents the alternative keys. With this set up, individual job cost reports may be developed that either show all phase information for a particular job (or all jobs) regarding the concrete phase only. Also, a report can be run that will pertain to all concrete wall forms. The decision on how a particular construction company establishes its phase format is in direct correlation to the degree of reporting information that is required. A small residential company may not want as high a degree of informational breakdown as a larger commercial company. 111 addition, a residential company may have entire phases, if not the complete job accomplished by individual subcontractors. Ifthis were the case, phase numbers may represent a one or two digit number fiom 1-16 that correlate directly with the CSI breakdown structure. With this in mind, it is extremely important to reconcile the current as well as firture needs of the company prior to establishing the phase format. 78 Categories: The use of categories within the phase structure is an important decision that can also not be changed once the system is in operation. Categories refer to the development of particular cost types being associated with the job and the phase. Categories are more commonly referred to as resources. Common resources associated with job phase items are: labor, material, equipment, overhead, and subcontractor commitments. Categories are either established or not established to be within the system, but even if they are established, individual items do not need category designations. For instance, the general division of three: concrete, does not require a category designation. Individual items can be selectively chosen for the category reference. The level of tracking that is required for a company needs to be determined. Ifmore than one type of cost is tracked, and if more than one. type of cost is used in the phase level, then categories should be set up in the initial establishment of the system. Billing Level: Simply stated, a company must consider two choices regarding the billing level: Should it be set at the job level, or at the phase level. This decision needs to be made at the inception of the process because it cannot be changed afterwards. If scheduled values are to be entered at the phase level now or in the future, the billing should be set at the phase level. Otherwise, the billing will need to be set at the job level. 79 Decision Options lALpplication TS-System None General Ledger Account Format Can include a combination of: Prefix A Prefix B Prefix C Base Account Suffix Fiscal COI‘III’OIS Can reside at: Company Prefix A Prefix B Prefix C Balance Sheet Level Can reside at: Prefix A Prefix B Prefix C Job Cost Job Format Up to three sections Phase Format Up to four sections Use Categories Always use Never use Billing Level By:Job By Phase sections Checks management none Accounts payable none fiyroll none Figure 4.1 Irreversible Decisions Timberline, 1994 80 4.3 .3. Processing Control Decisions Processing control decisions will afiect which accounts are used for various transactions. These decisions should be considered permanent decisions. Although they can be modified, doing so would alter the outcome of the company transactions. Processing control decisions do not affect either the general ledger or the job cost modules, but are prevalent in the main accounting system (TS-System). The processing decisions are those reflecting the accounting method and the use of batches. Accounting Method: The accounting method that a construction company subscribes to depends greatly on the type and size of the company. Two types of accounting methods are commonly used in theconstruction company accounting system, cash or accrual. The cash accounting method is the concept that profits and revenue are not recognized until the job is completed and payment has been received. The accrual system is the accounting method that recognizes revenue at the time that the expense is invoiced and revenue is invoiced. The accrual type is in direct contrast to the cash method of accounting. In the accrual system, expenses and revenue are not determinant on the completion of the project. As long as an expense has been incurred and invoiced, as well as revenue generated and invoiced, they both are documented as both an expense and revenue generating event. Most large commercial and residential companies follow the accrual accounting method. A small residential construction company will benefit more from the cash accounting method because it is simpler to account for project’s expenses and revenue once the project is completed. It takes more efl‘ort to use the accrual system and a more involved accounting department to document expenses and revenue in the official 8] ledgers while the project is underway. One very important point to make is that it is standard policy not to change from one system to another. Both have benefits and drawbacks, but once chosen, it is accounting policy not to change unless there is a substantive reason that can be accepted by the government. Batch Use: Batch is the term used for the updating of accounting information within your computerized system. It is acceptable to choose the default, which is to have the system assign batch numbers. Ifthe system assigns batch numbers, an available batch is any that is not in use. More importantly, when updating, all the available batches not currently activated are available. Batches are updated and are reflected in the system files for the particular application in process. The batch is updated and is balanced with the control total for the application. Batches provide an audit trail by allowing the user to trace transactions back to their sources. The batch is stored in each transaction and the batch record. Ifthe manual batch is chosen, the user can reopen the batch and make adjustments to the transaction. The batch that is open allows the user exclusive access. This prevents other users, particularly if the system is on a networlg from making changes to the batch while in use. (Table 4.2) 82 Application Decision Options TS System Accounting Method Cash Both Use Batches Use Don't Use Beneral Ledger None Job Cost None Check Management None Accounts payable Bank Account Use Operator Specifies for entire check run Method System automatically assigns per distribution Accumulate 1099 Check box Totals by GL Prefix lntercompany Check box Accounting Payroll fiy Groups Minimun one pay group required Multiple Master files One master file per federal reporting entity lntercompany Check box Accounting Figure 4.2 Processing Controls Decisions Timberline, 1994 83 4.3.4. Report and Inquiry Decisions Reports that are processed through the system will be designed by information decisions. These decisions are considered report and inquiry decisions, and can be modified, changed, or eliminated at any time the system is in use. These decisions affect only the Job Cost Module of the Timberline Gold system. The job cost module portion of the system is where the reports are generated for individual jobs and items within jobs. Many of the decisions already established (job number, phase number) will entitle the user to generate specific reports with as much versatility as is required. The information that is established, and/or changed in the job cost module is the responsibility of user defined keys. User Defined Key: The user defined keys are pre-defined areas of the job cost report that leave an area available for additional information. They can be chosen to represent a specific level of information detail that is usefiil for the company, or not used at all. Common applications for the user defined key can be the project manager’s last name, project architect, or project owner. By inputting this data, the information can serve as a “key” to sort information for one particular project manager, architect, or owner. For instance, all jobs that are under construction for a particular owner can be run, as opposed to all jobs under construction. 84 IApplication Decisions Options TS System None General Ledger None Job Cost User Defined Key 1 User Defined Key 1 User Defined Key 2 User Defined Key 2 (Alternate Keys) Check Management None Accounts Payable l'R’Feport Inquiry Order Three Sections can be made (Alternate Keys) Invoice Code 1 Job Commitment Approval ID GL Prefixes Equipment Payroll Job Cost Transaction Controls Employee detail Tax ID and fringe ID detail Pay ID detail Summarize General Ledger expense, liability and cash entries By Account By employee None Table 4.3 Report and Inquiry Decisions Timberline, 1994 85 4.4. System Requirements The operating system requires a windows environment. The 1997 requirements will be the Windows 95 operating system. The new windows based estimating system requires Windows 95, and the concept of integration requires this operating system. This research project includes the information flow and integration between two Timberline software products, Gold Extended accounting and Precision Estimating Extended. The two systems can be purchased and used separately, or integrated together. Gold accounting can also be integrated with other estimating software packages produced by other companies. The author chose to use both Timberline packages to insure a seamless integration process. It is important to confirm that all data are being transferred without the loss of any information. The modules that were chosen to be used in the Gold Extended system are the J ob Cost and the General Ledger modules (see table 4.3). These modules constitute the majority of the accounting transactions, whereas the purchasing and accounts payable and receivable modules magnify the accounting procedures in the General Ledger. J ob Cost insures that information used for the construction of particular jobs is transferred to relevant reports needed for immediate managerial decision making for the particular job. 86 4.5. System Setup for TS Gold The setup for the Gold Extended system is the input of company information through the use of various pull down windows similar to the pull down windows found in the windows operating system. The company set up is performed to insure that all the information is established relevant to the companies structure. 4.6. Example Company The company that will be established for the purpose of this report will contain a wide range of information to ensure that most of the applications available within the Timberline Estimating (PE Extended) and Accounting (Timberline Gold Extended, General Ledger module and Job Cost module) are utilized. The information that a company would want to keep track of, and various reports and accounts, are all dependent on the decision process when evaluating what is needed for the company. A construction company that is considering establishing a new system has in one form or another determined that there are weaknesses within the current system. Carefiil consideration should be given to current and future needs of a company when determining which system to adopt for a new management system. It is all too common for a company to deem it necessary to establish a new management system, but not know the correct questions to ask regarding the weaknesses of the current system and requirements for the new management system. Chapter five will detail the systematic steps required to establish a job cost system that firnctions along with the 87 estimating system. The parameters of thought must be expanded beyond the abilities and limitations of the current system in use. By determining the perfect system and creating a wish list, management can adopt a system that can either perform all or most of the requirements placed on its wish list. Those that are too difficult to operate within the system, or that are not cost effective in implementing can be eliminated through proper procedures of return on investment. If it is too expensive to include all of the things on the wish list, those items that are absolutely necessary will make it into the final system. Those that are not necessarily needed will not make the final system. Compromises will always be made in order to have an emcient and cost effective system, but it is important to realize the limiting factors associated with the system and understand the reasons regarding the compromises. The example company will be a construction company that is involved with both commercial and residential construction projects. The area of elaborate company definition will be within the commercial division due to the instances of involved detail that is commonly required by commercial construction. The project example will be of a concrete wall construction phase for a commercial project. Other phases, as well as complete projects, will follow the same steps involved with the wall example. This report will demonstrate: 1. The creation of a company within the Gold Extended Timberline software 2. Set up decisions within the General Ledger 88 3. Set up decisions within Job Cost 4. Set up requirements for Timberline PE Extended 5. Creation of a Work Package Estimate with Timberline PE Extended 6. Steps to integrate the transfer the estimate from PE Extended to Gold Extended 7. Finalization of the estimate in Gold Extended 8. Processing and reporting within Gold Extended 4.7. Creating of a Company within Gold Extended Timberline Software 4.7.1. Creating a new company: This step involves the pull down windows situated at the top of the screen in the initial Gold Extended window. Choose Utilities/System Administration/Compamz Setup (Figure 4.4). Input the company information, including address and phone numbers, and the directory path for the company. Do not use the current setup configuration (Figure 4.5). 89 Title Bar TS—Main-Timberline Applications _ S __ S Utilities System Administration Company Setup Print Files Security Log File Preferences Change Data Directory Custom Fields Data File Controls Delete Print File Delete Log File Compact File Restructure File Install Options Check File Rebuild File Update Dictionary Release Notes Figure 4.4 Creating a New Company in Timberline Timberline, 1994 90 4.7.2. Enter accounting information: Choose Company Setup/General Information choose an accounting method and if batches will be used. We will recognize expenses and revenue when they are invoiced, therefore we will use the accrual accounting method for the example company, and we will not use batches. (Figure 4.5) 91 CompanySettm-GencralLedger J Commny name Jones Construction Adhess 123 Main Street City St ZIP Portland Phone Accounting Method Batches X Aocral Use Cash X Don’t use - Both [ OK I I Cancel | LCreateNewCompanfl I BatchConnolTotals Figure 4.5 Setting the Accounting Method Timberline, 1994 92 4.7.3. Establish a window icon for the company: Exit the Timberline Gold Extended program. From the program manager, choose F ile/New to create a new icon for the company. Choose program item, and input the company description. At the command line, input: c: \tsgold\winprog\ts. exe and input the working directory. Press “OK”. The system has generated an individual icon that represents the company that is established. By entering the Gold Extended window, click on the company icon and immediately be within the TS Main system within the company. (Figure 4.6) 93 NewProgtam Oaiect New ~ mom 0 Pro Name 3‘“ Help Prominent Propertis Description Jones | OK I Command line: c:\ts d\ ' .exe Working Directory: c:\Joneg mm Figure 4.6 Creating a Window Icon Timberline, 1994 94 4.8. General Ledger Set Up Decisions: 4.8.1. Enter the account structure for the company: Choose the company icon from Timberline. Choose Utilities/System Administration/Custom Fields, click on GL Account and press “set up sections.” Enter “company” in prefix A- size “2” to determine that the company prefix of two will be the first numbers for the general ledger accounts. Add a hyphen between A and B and enter “division” in prefix B and “2” for the size. This establishes that the account for the general ledger will start with two digits for the company, and two digits for the particular division of the company. We will set up the company to have both a residential and a commercial division. “10-10” will represent “Company-Commercial.” “IO-20 ” will represent “Company-Residentiaf’. These numbers will be the first four digits of the accounting code. Enter “4” for the base. The base will represent the actual account in which the transaction will be joumalized in. For example: “10-10-1030” will be the account number for “C ompany-C 0mmercial Division-A ccounts Receivable.” 95 Account Structure Prefix A COMPANY 2 Digits Prefix B DIVISION 2 Digits Base Account 4 Digits GL Account Sections I Sample AA-BB-9999 Prefix A Prefix B Prefix C Base Suflix Desc I COMPANY I E] I DIVISION I I:| [ comm I Size D IZI [:I OK I I Cancel I I Test entry I f Help I Figure 4.7 Account Structure Timberline, 1994 96 4.8.2. Set up General Ledger Controls: From the TS Main screen, choose Applications/General Ledger Plus and click on the “Setup” pull down window and choose GL Controls. Create a General Ledger Master File by accepting and pressing “OK” to create a file. “Fiscal Entity” is a prefix, “Retained Earnings Account” is number 3010, and the “Suspense Account” is 99-99-9999. The suspense account will not be found. It is not necessary to create one at this time. 4. 8.3. Creating the Prefix (company) configuration for the General Ledger: Choose Setup/Prefix—Base/Company to enter the information. Enter “10” for the company as well as the company name. Set up the Fiscal Entity as “Division” and accept this information. Enter “99” for the company, and “Suspense” for the name. Again, set the Fiscal Entity to “Division” and accept. The company prefix will be number 10, and that the fiscal information will be developed at the division level. This tells the system that the fiscal dates will be dependent on the dates that are entered in the divisional configurations. Doing this allows separate fiscal dates for both the commercial and residential divisions of our company. The division level is defined in the proceeding step. 4.8.4. Creating the Prefix (division) configuration for the General Ledger: Choose Setup/Prefix—Base/Division from the pull-down in GL. Enter “10-10” as the division and “Commercial” for the name. Click the Fiscal Controls button and enter period and fiscal ending dates. The period cycle of a company can be monthly, quarterly, as well as bi-annually. Choose a quarterly cycle for the example. Set the balance sheet to division and accept the fiscal controls as well as the division setup information. Choose 97 Setup/Prefix-Base/Division fiom the pull-down in GL. Enter “IO-20” as the division and “Residential” for the name. Click the Fiscal Controls button and enter period and fiscal ending dates. Set the balance sheet to division and accept the fiscal controls as well as the division setup information. This procedure indicates that the model company will have two divisions, residential and commercial. The fiscal and period end dates have been indicated for each division and it is established that two separate balance sheets will be generated for both the individual divisions. 4.8.5. Create Base Accounts: Base accounts are dependent on the accounting structure that the company requires for the processing of financial transaction data. They constitute cash accounts, payroll accounts, work in progress, and payable accounts. The detail is dependent on the company. Earlier within the Company: Setup window we chose a four digit account representation. Choose Setup/Prefix-Base/Base Accounts and input the accounts listed. By marking the Control Account, transactions for the account will be provided by interfacing with other modules. The control account box does not need to be marked for any of the accounts inserted since the Accounts Payable is not being used, as well as the Accounts Payable, Accounts Receivable, and Payroll modules. The Store Cash Flow option allows the debit activity to be stored within the account. The Store Budgets option will include the account in the company’s budget. 98 4.8.6. Generate Accounts: Now that all the information pertaining to the numbering of the (1) company, (2) Division, and (3) Base Accounts have been placed in the system, accounts need to be generated and established for the different divisions. This will aflix the prefix (company and division) and the base (account numbers) into the accounting system. Choose Setup/Prefix- Base/Generate Accounts and include all base accounts. Choose “.”0K Choose the appropriate division from the General Accounts Division Records, and hit “Start”. At this time accounts solely for the commercial division will be created (division 10-10). 4.8.7. Establish the Suspense Account: Choose Setup/GL Controls and click on the Suspense Account Field. Press the Enter key and answer yes at the “add suspense account” message, then accept. 4.9. Job Cost Set Up Decisions: The job cost module has two important irreversible decisions that need to be made. Job Format determines the format and size of the job numbers, and Phase Format determines the format and size of the phase descriptions. 4.9. 1. Defining the Job Number (Job Format): Choose the company icon from Timberline. Choose Utilities/System Administration/Custom Fields. In the “Custom Fields” section, click on the “J C Job: Size” section and press “Set up Section” button. In the “Description, Section 1” enter “Year”, size “2”, and a hyphen. In the “Description, Section 2” enter “Job” and the size enter “3”. This establishes that the job number will be comprised of the first two digits 99 representing the year, and the following three digits representing the job number. For example: “97-001” represents “Year-Project number 1” Click the “OK” button to accept this change (Figure 4.8). ID Account Title Account Type Store Cash Flow Control Account 1001 general cash current asset x 1005 payroll cash current asset x 1030 accounts receivable cunent asset x x 1031 AR retainage current asset x x 1101 wip labor current asset x x 1102 wip material current asset x x 1103 wip subcontract cunent asset x x 1104 wip equipment current asset x x 1105 vw'p overhead cunent asset x x 1106 wip other . current asset x x 1803 furniture & fiXlures non-cunent asset x 2001 accouts payable cunent liability x x ID account tifle accourt type store budgets store cash flow control account 2002 ap retainage cunent liability x x 2040 tax liability current liability x x 2300 pr deductions current liability x x 3010 retained earnings retained earnings x x 4000 revenue income x x x 4005 discount taken income x x x 5000 constnrction costs cost x x 6115 earnings paid expense x x x 6135 fringes paid expense x x x 6200 misc expenses expense x x x Figure 4.8 Defining J ob Number Timberline, 1994 100 4.9.2. Define Phase Format: It has been indicated that the CSI sixteen divisions will be utilized for part of the phase format. The existing database We which uses a five digit numbering sequence that proceeds after the sixteen divisions will also be used. It is vital to the operation of the system that the same format is followed between the estimating program and the job cost program. Ifthe data are not represented in the same way, integration will not be successfirl. Other questions that need to be answered prior to establishing the phase format are: (1) are reports printed by specified phases, and (2) are the amounts at the phase level needed to be accumulated. Ifyes is answered to either of these questions, establish the system to understand the difference in phases. This is done by separating the phase and work package numbering sequences with a hyphen. Choose the company icon from Timberline. Choose Utilities/System Administration/Custom Fields. In the “Custom Fields” section, click on the “JC Phase: Size” section and press “Set up Section” button. Under “Section 1” in the description heading, enter “Group” and in size enter “2”. This tells the system that the initial two digits will represent the sixteen CSI divisions, and a space of two digits is being reserved for the divisions. Enter a hyphen between section 1 and section 2. Under “Section 2” in the description heading, enter “Section” and in size enter “5”. This will reserve five digits for the numbering sequence of the work package description. The numbering sequence for the work packages are already established within the estimating database, and will now transfer when we integrate the estimate to job cost. 101 4.9.3. Create a Job Cost Master File: Enter the J ob Cost module by choosing Applications/Job Cost from the TS Main screen of your company. Choose Setup/JC controls. Answer “OK” at the message for creating a J C master file. Enter the controls regarding Categories. Use categories (resources including labor, equipment, materials, and subcontract). Track Units; including labor and materials. Click on GL Transaction Controls and input the accounts, while ignoring the journals (only the GL and JC journals are being used). Retrieval Method: By Category to allow the use of resources, and Retrieve Prefix fiom Job to denote the Company and Job that the transaction correlates. The informational changes that have been placed in the system through job cost setup controls has been accepted. The system will now give warning that if any of the irreversible decisions are attempted to be changed that it will result in the loss of data. It is important to point out that prior to creating a job cost master file, all data should be reviewed to insure that the proper numbering sequences are correct for the company application. 4.9.4. Setup Standard Categories: Categories include labor, materials, equipment, and subcontractors. Choose Setup/Standard Categories and enter the appropriate information. Categories to be used include: L-Labor, group A cost account-1101 102 M-Material, group A cost account-1102 S-Subcontract (Commitment), group A cost account-1103 EQ—Equipment, group A cost account-1104. Accept these items. 4.10. Establishing an Estimate: Precision Estimating Extended is an estimating package that incorporates the use of a spreadsheet and a database. Various databases can be utilized, including third party databases, Timberline databases (residential or commercial), a customized database, or a combination of all. The database and the spreadsheet remain independent of each other, and it is important that a particular spreadsheet is called up with the appropriate database that was originally used for the estimate. The database provides the relevant information that was used for the estimate, including: costing information, items, work packages, and formulas used. The database used for this project is the Timberline commercial database because of the capability to incorporate work package takeoffs. The estimator is allowed to input relevant information for a package of the project, such as exterior walls. All relevant dimensional information is entered, and pre-defined formulas, as well as pre-established construction techniques will determine the quantities needed. It is not uncommon for a company to develop its own set of work packages for the style of construction that is commonly followed in the company, and/or area. Function keys are used extensively in PE Extended. 103 4.10.1. Set Up Requirements for Timberline PE Extended Initial Set Up and Company Information 1. 2. Enter PE Extended by typing “PE” at the DOS prompt Ensure that the appropriate database is being used by choosing Change Database Directory at the Main Menu and enter “COMMDB—U” and press enter Choose EP—Edit Database Choose EG-Edit General Information and enter company name and address information. (Figure 4.9) Ensure that JOB COST INTERFACE TYPE is set to “G” for Gold. This will insure that the integration process between Gold Extended and Job Cost is accurate. (Figure 4. 10) Press the F-4: Job Cost Information key Estimate Style phase formats: Yes. This continues the link that was initiated in the Job Cost module by establishing phase categories similar to the CSI divisional breakdown Gold Cost Phase Sufiix: 0 Directory of Company in J C: C:\ company directory. This will enable the estimating file to be transferred to the correct Job Cost file area after the integration process is completed in the PE Extended end. Files are created and left in the directory of the Job Cost company information when the transfer is completed in the estimating end. It is then necessary to go into the J C module to complete the integration process. It is not a clean, two 104 way transfer, but a half pass from estimating, and a half completion in J C. (Figure 4.11) Gold JC Categories L: Labor M: Material S: Subcontractor EQ: Equipment These categories need to match the categories that were entered in Gold Extended Job Cost Setup Choose F1: Accept JC information changes Choose F1: Accept general information changes Choose END: Return to main menu 105 Estimating Ext EDIT DATABASE EG Select an option and press ENTER —) EG Edit general information ES Edit standards WB Edit WBS informaiton EA Edit addons EL Edit labor/equip classes EF Edit formulas EI Edit items Figure 4.9 Edit Database Timberline, 1994 Estimatimg Ext GENERAL INFORMATION Company Name XY Z Construction Address 555 University Dr. City East Lansing State MI Estimating Phase Suffix 2 Job Cost Interface Type G Gold Using 3rd pary database? No Report hours M Hours per day 8.0 Hours per week 40.0 Default crew pricing method T Figure 4. 10 General Company Information Timberline, 1994 106 Estimating Ext GENERAL INFORMATION Job Cost Information Estimating style phase formats? YES Gold Job Cost phase suflix 0 Job Cost directory C: \XYT Gold JC cost categories: Labor Material Subcontractor Equipment Other [TIC/J t" 0,0 Z Transfer crew units as man hours? N0 Figure 4.11 Job Cost Information Timberline, 1994 Estimating Ext MAIN MENU PE Select an option and press ENTER CD Change database directory ED Edit database PE Produce estimate U0 Utility options END Done with Estimating Figure 4.12 Produce Estimate Timberline, 1994 107 4.10.2. Creating a Work Package Estimate in PE Extended Precision Estimating Extended has the capabilities to create a work package take-off. The default work packages provided by the software can be used and modified, or work packages can be customized for the specific needs of the construction company. This is not an easy task, and is one that requires proper training. The author will assume that the operator of the system has the ability to produce proper work package estimates. It is also important that the database is suitable for work package estimating. This is either done by the designer of the database, or by using a database that currently has the capability. The database being used for this example is one that is provided by the Timberline Company. It is the Commercial Builders database using Unit production standards. The steps involved with the creation of the work package estimate are as follows: 1. From the PE Main Screen, Choose PE-Produce Estimate (Figure 4.12) 2. Enter the name of estimate 3. Enter the drive on which to create new estimate (A or C) (Figure 4.13) 4. At “Copy an existing estimate” answer N0 5. Enter cover page information: Heading: The name of the construction project Estimate description and address Client information 6. At the bottom of the cover page, Choose F4: Next screen (Figure 4.14) 108 “4' " Ext ESTIMATING FILE SELECTION Create new estimate file? YES Name of this estimate file 2NDFLOOR Drive on which to create this file C Password (optional) Figure 4.13 Computer Drive Selection Timberline, 1994 ‘7 " " Ext ESTIMATE COVER PAGE Heading: Michigan State University: 2nd Floor Pour Estimate desc 2nd floor pour Architect Address 555 MAC Phone City East Lansing Engineer State Ml Phone Estimator Client Name Michigan State University Address Job Size City Duration State Rate Table Phone Report hrs Figure 4.14 Estimate Cover Page Timberline, 1994 109 7. Enter the Gold Job Cost Number following the numbering sequence 8. established in the Gold Extended Job Cost Setup: XX-XXX Choose F1 -A ccept Changes at the bottom of the screen (Figure 4.15) 4.10.3. Creating a Work Package Estimate 1. 2. 8. 9. From the Main Menu, Choose P T -Perform T akeojf Choose F 5 : Takeofl Options Highlight the “Work package takeofl” by scrolling to it and press ENTER Choose F10 for the available list of work package options Choose 03-Concrete from the available list by scrolling to it and pressing ENTER (Figure 4.16) Choose 0312 Walls: Straight fiom the additional list of options available, and press ENTER Choose F5: Enter dimensions and enter the dimension and various questions needed to perform the work package (Figure 4.17) When completed with the dimensions, choose F1 Accept work package After the estimate is generated, choose F1: Leave Takeoff 10. From the estimate spreadsheet, choose F1 -Retum to main menu 11. From the main menu, choose PR—Print Reports 12. Print standard estimate (Figure 4.18) 110 Estimating Ext ESTIMATING COVER PAGE JOB CLASSIFICATION Project Bid date Definable field 1 MWBE Minority Definable field 2 Women Definable field 3 Definable field 4 Gold Job Cost job number 97-100 Definable field 5 Bid winner Definable field 6 Amount Definable field 7 Definable field 8 OTHER BIDS Definable field 9 Name Definable field 10 Name Definable field 11 N‘ame Defigble field 12 Figure 4.15 Job Cost Set-Up Timberline, 1994 2nd Floorfi TAKF LABOR MATERIAL SUB ITEM QNTY PRICE AMT PRICE AMT AMT NAME Takeoff options Item takeoff Work package takeofi' Model takeoff Figure 4.16 Work Package Estimate Set up Timberline, 1994 111 211d flOQL Work Package Takeoff Item 03 12 Walls Straight Location Enter dimensions Memo Quantity 2.0 Length 300.00 Height of wall 10.00 1 3307.00 c 30 wall C Width 8.00 2 3114.00 f 10 wall F # of pipe blockouts 12.00 3 3116.00 10 ledge # difi‘ ledge blkouts 0.00 4 3118.00 10 Pipe & # runs of Chamfer 1.00 5 3159.00 20 Strip/ # runs pour strip 0.00 6 3390.01 rubl. Rub. C conc. Strength (psi) 3,000.00 7 3395.00 10 Rub Fi wall cone code 1 8 3159.00 25 Strip/ Is rub finish reqd? N0 9 3162.00 10 Keyway 74.7 cuyd $16,172. $218,338 / cuyd Figure 4.17 Entering dimensions Timberline, 1994 112 Total Item Description Amount 3000 Concrete 3114.00 Forms-Walls f 10 wall fnns - patn sys ' 16,800 3118 Forms - other blkouts 10 pip 8 bm blckts etc. 360 3159 Forms - strip & oil 20 strip/oil frms-walls 3,378 3161 Forms - Chamfer strip 10 Chamfer strip (3/4") 600 12,000.00 sf 10.00/ hr labor hrs 24.00 ea 10.00/hr labor hrs 12,000.00 sf 10.00/hr labor hrs 600.00 If 10.00/hr labor hrs concrete labor hrs Figure 4.18 Standard Estimate Timberline, 1994 113 9 .55/sf 900 120 10.00 ea 12 3,000 6.00/gal 300 480 .20/lf 48 1 788 7800 240 378 120 8538 4.11. Integration of the Estimate and Job Cost module: The setup of the interface option in Timberline PE Extended results in attaching the estimate, as well as all of the item information into the Job Cost Gold Extended package. The interface setup needs to be done after the estimate has been established in PE Extended and the company information, as well as prefixes and bases, have been developed in the Gold Extended package. The particular job needs to be decided in the estimate, but does not have to be established in the Gold Extended module prior to integration in the job cost package. The job number does need to follow the same year- job number configuration in estimating that was established in the accounting package. The file is sent to the job cost file that was determined in the initial job cost set up stages in the estimating software. The steps involved in the interface connection are as follows. 4.11.1. Creating the Interface From Precision Estimating and Job Cost Accounting 1. From the Main Menu in Precision Estimating, choose IF: Interface 2. From the Interface Menu, choose GJ: Generate Estimate to Job Cost (Figure 4.19) 0 Enter the Job Name 0 Is it necessary to delete the temp work file: Yes: this will eliminate the temporary file that is generated from Precision Estimating after it is used to input the data fi'om Gold Extended 0 Accept Gold I C Job number 0 Reference number set to C: JC category 114 0 Description set to C: J C Category description 0 Round quantities: either yes or no 0 Allocate Add—ons: our example does not use add-ons 0 Generate Burden entries set to NO: our example does not use burden (Figure 4.20) 0 Send to Printer . A report is generated that gives how many J C transactions were generated, and how many warnings (refused transactions). (Figure 4.21) The transactions and their amounts are listed on a separate report; check the grand total to make sure the amount matches the bottom line on the estimate (Figure 4.22) . Exit Estimating 115 Estimating Ext Exterior wall INTERFACE OPTIONS GL Select an option and press ENTER GJ Generate estimate to job cost IC Import Cut & Fill volumes GQ Generate quote sheets to BidF ax END Return to PRODUCE ESTIMATE Figure 4.19 Interface Options Timberline, 1994 Estimating Ext GENERATE TO JOB COST OPTIONS Gold JC Job number Transaction date Reference number Description Round Quantities Allocate addons Generate burden entries Optional user field 1 Optional user field 2 97-100 1220-1998 C C YES NO NO L Location Blank no value Figure 4.20 Generate to Job Cost Timberline, 1994 116 XY Z CONSTRUCTION Generate J C Transactions TRANSACTION GENERATION TOTALS Estimating Ext Exterior wall Total warnings 0 Total I C transactions generated 13 Figure 4.21 Job Cost Transaction Report Timberline, 1994 XY Z CONSTRUCTION CO Estimating Ext Generate J C Transactions Exterior Wall Job Number 97-100 Transaction Date 12—20-1999 311400 9,000.00 9,000.00 L 311400 7,800.00 7,800.00 M 311800 120.00 120.00 L 31 1800 240.00 240.00 M 315900 3,000.00 3,000.00 L 315900 378.00 378.00 M GRAND TOTALS 20,538.00 20,538.00 Figure 4.22 Job Cost Transaction Grand Total Report Timberline, 1994 117 4.12. Finalizing the Integration of the Estimate within Gold Extended There is now a .JCT file in the directory of the company in Job Cost-Gold Extended. The information has not been sent into the job cost system yet. It is necessary to open up the job cost module for the company and finish the integration process. The forward pass has been thrown, now it is up to the job cost module to move towards the pass and bring it into the system and complete the integration process. Once the integration process has been completed, the temporary .JCT file will be erased from the company’s job cost directory. 4.12.1 Directing the .JCT File into the Job Cost Module 1. Enter the company by clicking on the company icon .N Choose Job Cost from the Applications pull-down window 3. Choose Other/ImportlImport Estimates from the pull down window 4. Click on “List” at the bottom of the Import Estimate screen 5. Choose the file from estimating 6. Choose a name for a file where rejected items will be transferred to. It is not necessary to place the .JCT extension on the file name. The creation of this file is essential since the .JCT file from estimating will be eliminated. The operator will be able to check this new file for any items missing from the transfer. 7. Click on “Printer Setup”, and turn off the print to file button 8. Select “OK” and select “Start” 118 The report will print out a listing of accepted phases Check the total amount and compare it to the printed estimate total (Figure 4.23) 9. Choose Workflow/Update Master File click on “Printer Setup” click off the print to file button click “OK” and “Start” This process updates the master file with the items that have transferred fi'om estimating (Figure 4.23) 10. Choose Worlqlow/Estimates 11. The new JC file is not found. Click “OK” 12. Click “List” 13. Choose your job number and select “0K” 14. Click “Finalize original Estimate” and press enter: This finalizes the estimate. It is important to know that once an estimate is finalized, any changes after that point need to be made as Change Orders. 15. Choose Reports/Other/Estimate Spread Sheet 16. Click on “*Conditions*” 0 click on AND Grp Phase Condition NE “000 ” 0 click “Change” 0 click on “000” and add two more zeros to make it “00000”: 119 This is done to update the report to accept the five digit number proceeding the CSI divisional number. Without this change, the report would not be able to print the proper information. 0 click “0K” 0 click “OK” at Condition Selection Screen 0 click on “Ranges” to select only the job just imported 0 Choose the job number, and “0K” 0 Select “Start” to print the estimate report from Job Cost 17. Set the printer up as indicated earlier 18. Not fit on sheet, accept “0K” 4.13. Processing within Gold Extended 4.13.1. Enter Descriptions to Phases: The descriptions of the items are not carried through from the estimating database to job cost. The descriptions are required to be manually placed in the job cost module. This manual update is only required within the system once. Once the individual item is created in the job cost database, it is recognized when used for another imported estimate. 1. Choose the Setup/Edit Job Information/Edit Phases pull down window 2. Click on “List” 3. Choose the job number 120 Click on “list” for imported phase records . Enter descriptions Accept the change . Repeat the process for the remaining items 4.14. Applications and Reporting within Gold Extended 4.14.1. General Ledger The applications associated with the general ledger are common to the accounting process. The speed and accuracy of the computer is the most important aspect of the system. Mistakes are limited to the input of data, not due to improper double entries. Transactions are posted immediately to the proper account, and the balances are readily available. The applications associated with the General Ledger are as follows: 1. 2. The input of transaction data Establishing the period and year beginning and ending dates . Expense allocation Balance sheet reporting Income Statement reporting Revenue allocation Error correction Payable and Receivable tracking 121 4.14.2 Job Cost Reporting The use of a job cost system establishes control over the monetary expenditure and profit percentage of a project. Immediately reporting data for the cost control of the job allows proper knowledge regarding the expenses, and facilitates changes that may need to occur in order to realize a potential profit margin, as well as maintaining costs within a targeted range. Reports currently available include: 1. Billing 0 Schedule of Work in Progress 0 Billing Summary 0 Billing Detail 0 Cash Flow Variance 2. Unit Control 0 Unit Cost 0 Unit Cost Summary 0 Historical Unit Cost 3. Estimates 4. Jobs 5. Cost Control 0 Profit 0 Profit Variance 0 Job Cost Summary 122 0 Cost at Completion 0 Cost by CSI Division 6. Committed Cost - Committed Cot 0 Subcontractor Documentation 0 Purchase Order 7. Change Order 0 Change Order Log 0 Change Order Forecast 0 Change Order Approval 0 Change Order Documentation 8. Labor Control 0 Labor Cost 0 Labor Forecast 0 Productivity Variance 123 97-1 00 97-1 00 97-100 97-1 00 97-1 00 97-1 00 97-1 00 97—1 00 97-1 00 97-1 00 97-1 00 97—1 00 97-1 00 phase cat 3-11400 L 3-11400 M 3-1 1800 L 3-1 1800M 3-15900L 3-15900M 3-16100L 3-16100M 3~16600M 3-30700L 3-30700M '3-39001 L 3-39001 M Entry Totals Additional Information added added added added added added added added added added added added added added added job 97-100 job 97-100 job 97.100 job 97—100 job 97.100 job 97.100 job 97.100 job 97.100 job 97.100 job 97-100 job 97-100 job 97-100 job 97-100 job 97-100 job 97.100 Number of transactions Total amount of transactions phase phase phase phase phase phase phase phase phase phase phase phase phase phase phase units 3-000000 3-11400 3-11400 3—11400 3—1 19800 3-11800 3-11800 3—15900 3—15900 3-15900 3—16100 3-16100 3—16100 3-16600 3-16600 OOOOOOOOOOOOO amount 9,000.00 7,300.00 120.00 240.00 3,000.00 378.00 480.00 120.00 1057.00 11 1 1.1 1 6556.00 1400.00 120.00 32,382.11 concnne phase added by estimating cauxxxy l cahxxny rn phase added by estimating category I rxnegoqr rn phase added by estimating cauxyny l cafixxny n1 phasetxkkxibyexnhnafing category I (Inegon/ rn phase added by estimating category m Figure 4.23 Master File Update Timberline, 1994 124 4.15. Summary The company setup within the Timberline Gold Accounting system can be summarized by three basic steps. (1) establishment of the company within the system, (2) general ledger account structure, and (3) job cost set-up. These three steps are depicted in model form in Figure 4.25. Both the establishment of the company and the general ledger account structure correlate with each other in as much that they help to determine the numbering sequence for the accounting system. The correlation between the two help to establish the needed information for queries that will be used to gather information for reporting purposes. The job cost set-up consists of two main functions. Determining the numbering sequence of the job number, and defining the numbering system for the individual items to be categorized both in the estimate and the job cost module. The importance of the job number is, as in the general ledger structure, to establish query capabilities for firture reports. The item numbering sequence is established to directly correlate with the estimating database. The numbering system is the heart of the integration process between the estimate and job cost module. The model of the whole process is shown in Figure 4.25. 125 _ ......... EslahhshCompanyirLtheSystem-_----------------_---------------------, Company Number Create Company Division Number ...................................................................... L---------------. xx-xx-x\xx General Ledger Account Structure Company Prefix Division Prefix Base Account Job Cost Set—Up Year I Define , xx-xxx Job Number ' Project I Number Estimating Database Define Phase CSI division I CSI division xx-xxxx Sub Item I Sub Item Figure 4.24 Job Cost Set-Up Summarization Model Bertolini, 1998 126 Chapter 5 Case Studies and Model Implementation 5.1. Introduction What is the purpose of a construction company? Is it to construct buildings, bridges, or any other type of facility, or is it to make money? The purpose of any business is to make a profit with their enterprise. It is important for a company to ask itself “what it is that we do”. This may sound like an extremely obvious statement, but it is critical to firlly understand the purpose of the company prior to evaluating or re—evaluating the informational system of the company. As stated above, it is obvious what a company does. It attempts to make a profit through its business practices. The business practice is what is important to define. By determining the company structure in its simplest form, it is possible to determine the areas of efficiency and inefficiency, as well as determine the areas that will most benefit from a comprehensive information management system. When a company determines that the informational system that it is using is insufficient and needs to be changed, a tremendous opportunity exists to evaluate its whole business in order to define, design, and implement a new system. One way of evaluating the structure of the company is by developing a Value Chain (Batini, Ceri, Navathe, 1992). This is a model that depicts the way in which a company operates through the course of its business cycle. The overriding item of interest is the flow of money through the organization. Money is generated through investing, borrowing, and through profits. The flow of 127 money through the organization is the reason the company is in business, therefore this is the item which should be modeled. The typical construction company value chain involves activities both within the company and outside the company. It is very common for the outside involvement to be both financed through investors or a bank, and subcontracted through outside labor forces. The use of in-house labor has decreased over the years. Larger construction companies as well as smaller residential companies are utilizing a higher degree of subcontractors to perform the construction of their projects. This eliminates the need for carrying the expense of a construction crew, as well as the need to consistently have a project underway to keep the labor force busy (although this is what needs to occur to make money). 5.2. Value Chain The value chain measures the processes involved with the company (Batini, Ceri, Navathe, 1992. Each major activity group is broken down into its individual components. Each process that is directly involved as an aspect of both the generation of profits (cash receipts) and expenses (cash disbursements) is subdivided and separated. Each of these subdivisions depicts the simplified processes involved for that particular area of the business. Each process consists of both an input and an output. The input is usually an outlay of cash in order to produce the necessary activity for that particular process. The output that is generated by the individual process becomes an input, in one form, into 128 another operation of the business. The interesting aspect of the value chain process is that the initial input into the company is capital, as well as the final output of the company. It can be argued that the final product of a construction company is the completed construction project. Through the use of the value chain model the beginning and final aspect being measured of a company is that of capital and profits. The value chain can be a useful tool for a construction company in helping to determine the processes that comprise the company and the development of an information system. The usefulness of the value chain is its ability to determine the importance of certain aspects of a company. The model allows the view of the company through independent eyes. The benefit of using a consultant is the ability of an outsider to see the company without bias. The concept of the value chain is that the independent fresh view can be shown through modeling. 5.3. Value Chain for a Typical Construction Company The value chain for the typical construction company can be simplified to six major components. 1. Financing Process 2. Subcontractor/Labor Process 3. Material Acquisition Process 4. Equipment Acquisition Process 5. Construction Process 129 6. Contract (Phase) Finalization Process 5.4. Value Chain Model The model shown as Figure 5.1 shows the relationship between the processes that make up the typical construction company’s value chain as seen by the author. The individual processes are explained more thoroughly in the subsections of section 5.4. Financing Process ‘ Cash Disbursemcn Cash Subcontract/labor process Contract (Phase) Finalization Cash /\ Labor Disbursemen V Acquisition / Cash ‘ C Material Disbursemen Acquisition completed Construction Process project material Cash Disbursem en Equipment Acquisition equipment Cash . c ‘ Equipment Disbursemen Acquisition Figure 5.1. Construction Process Value Chain Bertolini, 1998 130 5.4.1. Value Chain Symbols The symbols that are used in the value chain model depict the relationship that the individual items have with each other. The oval circles and the items within the circles represent processes. Each process requires an input, and produces an output. At the initial process, the main input is that of capital shown in the financing process in Figure w The boxes that are within the process circle represent an activity that correlates with another activity. It is the activity that is being depicted through the process. The diamond with lines extending to each activity that shows there is a relationship between the connected activities. For example: cash disbursed acquires labor, material and equipment. The arrows that lead to the process circle represents the input. The arrow going away from the process circle shows the output that the preceding process accomplished, and subsequently becomes the input for another process within the company. 5.4.2. Value Chain Financing Process: The financing process consists of the initial investment and continued input of cash including that acquired through profits generated by the business (Figure 5.1). Cash receipts are those that are received either through construction loans and/or business loans. Cash receipts also include revenue generated through the course of business. Cash disbursements include payments made for the repayment of the business and construction loans. This process can represent the initiation of the company. Any start up company needs an infusion of capital in order to operate. Even if the initiation of cash is through investors, a return on investment is expected. A return on investment is expected if the investment is made by partners or interested parties. The final result of the financing process is the availability of cash to be generated to the rest of the value chain model and the processes involved. 5.4.3. Value Chain Subcontractor/Labor Process: This process involves the infiision of capital through cash disbursements of the company in order to acquire the labor to facilitate the construction of the project (Figure 5.1). The cash input is received from the financing process allowing the generation of labor through the subcontractor/labor process. This process can involve two possibilities. These can be used independently or in conjunction with each other. Subcontracted labor has become more popular for a majority of construction (management) companies. A construction company enters into a contractual arrangement with a subcontractor who will perform the work necessary to complete the projector a portion of the project. This work will usually consist of either a subsection of one of the CSI divisions, all of the CSI divisions, or a number of the CSI divisions. Labor constitutes the acquisition of a work force that will conduct the construction of the project. Again, this can be and is usually only a portion of the project and very rarely the whole project. Most projects consist of a combination of the two types of labor force. Cash disbursements consist of capital leaving the company to acquire the subcontractor/labor process. Labor, which is the output of this process, will become one of the inputs for the construction process. 132 5.4.4. Value Chain Material Acquisition Process: The material acquisition process is one that may or may not be used for a construction company (Figure 5.1). Most will have some degree of materials that will need to be purchased, even if the majority of work is being performed through a subcontracted work force. When subcontractors are used, they may be required through the contract to provide the materials for their section of the project. Often times there is a combination of the construction company and the subcontractor supplying the materials needed. Cash disbursement results from capital leaving the company for the acquisition of materials. The output of the Material Acquisition process is the material that will become one of the inputs for the construction process. 5.4.5. Value Chain Equipment Acquisition Process: Equipment use is similar to that of material acquisition (Figure 5.1). Some projects may not require this particular process, therefore it would not be included in their value chain. Cash disbursements represent capital expenditure for the acquisition and use of machinery and equipment used for the project. The output from this process will become one of the inputs for the construction process. 5-4.6. Value Chain Construction Process: The construction process includes the introduction of labor, materials, equipment, and subcontractors for the actual construction of the project (Figure 5.1). This is independent of the infusion of capitol. The investment in the individual sub/labor, material, and 133 equipment processes will be measured. The output of this process is the completed project and will serve as the input into the contract (phase) finalization process. 5.4.7. Value Chain Contract (Phase) Finalization: The contract (phase) finalization process is the culmination of the construction process by either completing the project, or finishing a phase that allows for the receipt of money. All money and resources that have been input into the system result in the finalization of this phase. The output of the completed construction project or phase is received from the construction phase and is used as the input into this final phase. The output is the cash receipt (cash received) for the project or phase completion. This is the epicenter of the value chain for any company; money received for work completed. The output of this process is the cash that is generated and eventually re-entered into the company value chain circle. After salaries, wages, benefits have been paid, the capital is re-invested either in the subcontract, material or equipment processes or re-entered as payment for capital received through investment and financing. 5.4.8. Value Chain Model Description: Figure 5.1 depicts the value chain for the construction company. This generalized, simplified model shows the diflerent possible aspects that may constitute the daily activity of the construction company. Some items may be left out if not used. Examples of this can include dispute/litigation, warranty. If this is the case, the whole process can be easily eliminated from the value chain because of the simple form of the model. For instance: if a company does not rent, purchase, or provide machinery for the project, this process would simply be eliminated fi'om the value chain. It may be the responsibility of the owner, or more than likely the responsibility of the subcontractor to provide equipment. Although this thesis has concentrated mainly on the contracting company as being responsible for the whole project, this model can also represent the subcontractor as a business entity. Subcontractor/labor may include both hired laborers, skilled and unskilled, as well as secondary subcontractors that they may hire for certain aspects of the project. The value chain lays the groundwork and establishes the entrepreneurial heart of the organization. It is the measurement of what the company does best. The construction of the project and how the company is established and prepared to realize this goal is the means for accomplishing the only real goal of any business, the generation of profits- It is only after the value chain is developed that a company can truly look at its operation and define the need for an information system that will benefit its business. A secondary benefit is that a company may find inefficiencies in a particular area or areas that may be modified to help streamline the organization. If one aspect of the value chain is not producing as it should, or is hampering the efficiency of a company, that portion of the company may need to be eliminated. For example, it may become obvious after reviewing the value chain model that too much emphasis is being placed on in house labor. Revenues are not being made or overall revenues of the company are being reduced due to inefficiencies. Through modeling, it may be established that hiring subcontractors may be a more efficient use of company capital providing a higher rate of return. , _ _ _ v 5.5. REA Modeling REA (Resource-Event—Agent) modeling is the application of an object orientation to the modeling of the value chain of a business(Geerts, McCarthy, 1996). Object orientation in the case of the REA model is the visualization of how the system will operate. It does not involve the confirsing language of a computer software system designer. This is one of the advantages of using the REA model. There are no predetermined rules of why something can or cannot be done due to the limitations of the software language. The symbols represent the relationship that an application has with another application of the system. The lack of limitations allows the design of a system to be what is needed, not what is currently available through technology, or not available due to a lack of technology. The main idea behind the REA modeling technique is that it can serve as a template for the company’s information system. How the information is supposed to flow through the system, and the relationship between various transactions and company representatives (estimating, accounting, sales, vendors) is shown in model format. By generating an REA system model, a company can determine the specific needs required by the system and can better judge if the existing system is operating efficiently and effectively. The conceptual design of an information system for a company measures various levels of events that represent the company interaction in its process to accomplish its goals. In the case of a construction company, those goals are the completion of the project and the receipt of cash (and profits). The makeup of a construction company is composed of the 136 data that relate to the input and output of various economic resources in the value chain processes of the company. Cash is exchanged for various resources including labor, materials, equipment and subcontractor commitments. These resources are converted into a completed construction process through the business practices of the company and exchanged for cash by the owner(s)- The business practice is cyclical as money created as the final output is placed back into the company as an input with the hope that more money will be made at the end of the business cycle- The accounting system is the primary system for tracking the value chain activities. REA modeling offers the opportunity to fiilly depict the economic transactions in an object orientated view for conceptualizing the data that depict the economic transactions within a business enterprise and its information system. The main idea within the REA model is the use of economic events, economic exchanges, and value chains, instead of the traditional double entry accounting method view- The objective of the model is to create a view of what the business enterprise does and attempt to design a system that takes firll advantage of the strengths and weaknesses of the company within the system. The system need not waste time and money by generating information that is unnecessary (those relationships that do not support the value chain of the company). By determining what the system is required to do for the particular company, the information system can be designed and be set up to run more efliciently and easily, accomplishing the goals which are most important to the company. 137 5.5.1. REA Entities: Entities represent real world objects within the REA model (Batini, 1992) and are represented by boxes. Person, employee, materials, owner, and suppliers are examples of entities within the construction company. 5.5.2. REA Relationships: Relationships represent two or more entities (Batini, 1992) that aggregate. Material has a direct relationship with a Supplier. Material and Supplier are the entities, and is supplied is the relationship. Relationships are depicted by a diamond in the REA model. 5.5.3. REA Attributes: Attributes represent the information that is associated with the individual entities. Supplier may have a supplier number, name, address and phone number. One attribute is of importance to each entity and should be distinct only to that one single entity. No two suppliers will have the same attribute for supplier number. The attribute of supplier number is the defining key within the information system for that entity. 5.5.4. REA Agent: For every economic activity there is an agent within the company (internal) or outside of the company (external) who is responsible for that activity. If a company makes a sale, a salesperson may be the internal agent that represents the activity. 138 5.5.5. REA Resource: The business concept is that of providing services or goods for the return of money. This is considered one of the economic resources. There are generally two economic resources associated with any company: a give and a take. A give is the acquisition of some type of asset for the outlay of cash. The company is giving up one thing to acquire another. A take is when the company receives money for selling the goods or services. Typical economic events are the sale of goods, and the purchase of supplies. 5.5.6. REA Event: The economic event is the actual sale (take) or purchase (give). The resources (supplies) are purchased (economic event) by a purchaser (agent). The event is what typically constitutes a business practice. Goods are usually purchased to be transferred into final sellable products. 5 .6. REA Model The REA model represents the simple form of the activities and relationships involved in the business operation. The REA model is easy to read, and the readability is enhanced by being able to draw it at different levels of detail (Batini, 1992). The REA model is a compromise between expressiveness, simplicity and nrinirnality. The REA model resembles what is occurring in the business enterprise. Resources are consumed and the result is the (new) resource acquired, the outflow and inflow event of every business. The outflow has a resource that is consumed, and the inflow has a resource that is acquired. By incorporating the value chain, the company is modeled at what it does best. The value chain is the determination of what tasks are needed to affect an event. VVrth the REA model, tasks are exploded out until the enterprise is modeled to its highest degree of efficiency (how it makes money and provides value to the final customer). The REA model allows the company to change at the task level. The value chain and the REA structure remain constant, and the task level is wiped clean. This allows the distinct opportunity to re-engineer and to change while not compromising the goal of the enterprise. 5.7. REA Model of the Construction Company: The REA model of the construction company is designed through the use of the value chain model. The value chain is exploded into its individual components in order to visualize the Resources, Agents, and Events. The events are represented by the value chain processes: financing, subcontractor/labor, material, equipment, construction, and contract (phase). Financing: Financing is represented by the relationships between the entities of: Cash Receipts, Bank, and Cash Disbursements. 140 Cash Bank Cash Reciepts _<>— ———<>—— D isburem ents Figure 5.2 REA modeling of Financing Modified from Batini, 1992 The connection of the diamond to the two events represents the relationship between the two. The relationship between cash disbursements and cash receipts with the entity of bank shows that this company stores its money in a bank account and all firnds going in or out of the account has a direct relationship with each other. Resources: The acquisition of labor, materials, subcontractors, and equipment can be simplified to resources. The REA representation for this process includes the entities: Resources, Project, and Cash Disbursement. Resources are acquired (inflow) for the project and are paid (outflow) for via the cash disbursement account. 141 Project < > ‘ Resources __ . .1; 3.: . 51.: i..:...::..,:: :3 3... an ‘8 i t .21 n . 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