Cost accounting is one of the branches of accounting that aims to record and classifying cost data to provide information on project costs to assist management in planning, control, and decision making, cost accounting is used in all activities (manufacturing- agricultural- business- construction, etc.) in an activity that can be applying cost accounting to it, and cost accounting has a significant role in the construction sector, through cost-accounting tools, we can calculate all project costs accurately, and then to assist management in functions of planning, control, and decision making, and through this post, we will review cost-accounting tools in construction companies.

What is the role of the Payment certificates in the best accounting software for construction businesses?

The payment certificates are considered a tool for cost accounting in surveying the work items costs in the payment certificate; these are bill of quantities, the executed quantities currently, the executed quantities previously, the total quantities and the prices of the items (category) in addition to the percentage of completion and deductions and other items, the payment certificate is divided into two types (the owner’s payment certificate - subcontractor payment certificate).

Owner's Payment Certificate 

It is a payment certificate made between the customer (the owner of the project) and the general contractor to pay cash amounts due, so the general contractor surveying the work to know the executed quantities and adding the quantities previously executed to the payment certificate and issuing the payment certificate to the customer with the total quantities and the customer reviews the payment items and the contract terms and the payment certificate is paid after deduction of all agreed deductions previously according to the contract concluded between the customer and the general contractor.

Types of Deductions

These deductions are

Advance payment previously paid by the customer

Before the general contractor starts implementing the project, the customer (the owner) paid an advance payment, often 10% of the value of the process, as a contribution from the customer in providing the necessary liquidity to the general contractor in the implementation of the project, and deduct this advance payment by a percentage of each interim payment certificate until it is liquidated.

Social Insurance

According to the contract with the general contractor, the customer pays social insurance for the project labor and deducts the value of social insurance from the payment certificate.

Withholding Tax

The customer deducts withholding tax from the general contractor and provides it to the Tax Authority.

Retention 

The customer retained a percentage of the amount certified; often 5% as a guarantee of each interim certificate, and gets it back to the general contractor as soon as the preliminary handover.

A subcontractor payment certificate

It is a payment certificate between the general contractor and the subcontractor to pay the amounts due to the subcontractor and is prepared by the technical office of the general contractor by surveying of completed work and often one of the items of the project and the general contractor pays the payment certificate to the subcontractor after deducting the same deductions that exist in the owner's payment certificate almost.  

The payment certificate is a powerful tool of cost accounting tools in the surveying of work and determining the costs of each item and through AccFlex constructions software, we can easily prepare the payment certificate by reviewing the items of the works and quantities recorded in advance in the bill of quantities as well as price categories, preparing the payment certificate as quickly and accurately as possible as well as possible through the tool of the of payment certificates to determine of all variances of performance, whether negative or positive on standard budget comparing to the actual costs and planned costs.  

What is the role of cost accounting for construction? 

construction companies follow one of the cost accounting systems, which is the job order costing system which is mainly based on accumulating the costs of each job order separately, the nature of the contracting activity ‘building and construction’ varies from job order to another may be a job order to build a hospital different from another job order to build a school, and therefore each process (job order) is dealt with separately and determines its cost centers and determine its cost elements as well as the control of the cost elements and in any case, aim to reduce the operating costs of processes to treat the variances of planned costs from actual costs and work on the implementation of the standard budget of the project to achieve cost savings and then maximum operating rates to achieve maximum return as quickly as possible and to achieve this is a chart of cost centers and link them to accounts.

Chart of Cost Centers 

The costs are divided by determining each production unit (department) within the project and creating a cost center of its own and it is allocated with all of its expenses, for example that the headquarter is divided into (finance department- procurement department- technical office- administrative affairs-...) and divide the project according to each of the project items as a cost center (plumbing- ceramic works- plaster works...) as well as the project departments (site engineers department- warehouse workers- site accountants department-....) to make it is easy to allocate each cost center to its expenses, so we can determine the cost and the return from each department (cost center) and thus its impact on the overall company's profit/loss, and we should mention that construction accounting software have a significant role in assignment of cost center to account through the possibility of creating a chart of cost centers and linking the accounting  journal entry to its cost centers in a way that makes all project revenue/expense is allocated to its cost centers and achieves the purpose of cost accounting in construction companies.

Cost centers in construction companies can be divided into

1- Cost Centers that generate revenue

A- Construction cost centers

B- Real estate investment cost centers

2- Service cost centers

A- Operations services cost centers

B- Advertising and marketing services cost centers

C- Administrative and financing costs centers

There are a set of elements of prime costs that a construction company incurs to generate revenue, which is represented in the 

Elements of Construction Cost

To generate revenue, costs must be incurred, as the concept of cost is mainly an expense that aims to generate revenue, other than the concept of expense, which is not required to pay to generate revenue and therefore operating expenses in the sites are costs because their purpose is to generate revenue through the payment certificate, cost elements in construction companies are divided into 

1- Materials

Which are all direct materials that are purchased to project implementation, such as construction materials (sand- cement- rebar- ...) and materials of carpentry, plumbing, electricity, and marble, etc. they are one of the prime costs included in the bill of quantities, and may be purchased directly and storing them on-site, or storing them in warehouses until it is needed, it will be issued from the warehouses, and it may be purchased in cash or credit through suppliers.

2- Labor

The wage item is the project staff salaries, whether it is the company's day labor or the hired labor, as well as site engineers, supervisors, administrative staff, accountants, and other wages incurred by the company for the project implementation.

3- Overhead

These are all indirect expenses incurred by the construction company to implement the project and supervise and control it, such as the salaries of managers, workers, and administrative staff in the head office, as well as transportation expense, contract expenses, depreciation expense, as well as the subcontract contract cost... etc.

Cost control in construction companies

The main objective of cost accounting is the control costs process, by achieving the maximum possible efficiency of the elements of costs, materials, labor, and overhead, by preparing the budget for a project before starting to implement it and comparing the actual costs to the planned costs to determine the performance variances and analyzing these variances to know their causes whether they are these variances are positive or negative, for example, if we find out that the actual labor costs for the project are greater than the planned labor costs, it is necessary to determine the variance amount and the reasons for this variance, and then work to solve this problem as well as a quantity variance if the actual quantity of raw material is greater than the standard quantity, the variance must be determined and find out its causes, and was there a mistake in the technical and engineering feasibility study of the project or is there a mistake in implementation to other reasons that guide us to the reasons for the quantity variance to reduce the cost to the lowest level and making the costs is planned, so that the company always achieves its objectives by achieving the maximum benefit for the cost elements through cost accounting in the construction companies, it is worth mentioning that AccFlex constructions software performs the cost control process as quickly and accurately as possible, it is through AccFlex constructions software it is possible to link between the actual payment and the budget for payment, it is not permissible to paid any amounts or quantities that exceed the planned, and one of the leading example in this matter is the best accounting software; AccFlex constructions software, which links the budget of the construction company with the actual payment, whether it is for the elements of materials, labor or overhead, which makes the construction company get the maximum benefit from its costs elements and then achieves the maximum possible profit.

Advantages of the best accounting software for construction business (AccFlex Constructions Software)

There are a set of features that are characterized by the best accounting software for construction business (AccFlex constructions software), which can be mentioned as follows

1- The ability to add the contract line items

The best accounting software for construction business (AccFlex constructions software) is characterized by the existence of a screen through which to enter all the contract line items by quantities and prices in the contract and then can create a project budget and compare it with the actual, to control costs and a comparison between actual costs and the planned costs to determine the variances and this screen is considered one of the strengths of AccFlex ERP production planning software.

2- The ability to link the contract with the payment certificate of the sub-contractor

The best accounting software for construction business (AccFlex constructions software) is characterized that when preparing payment certificate for the subcontractor does not need to re-enter the work items, but there is a link between the contract line items predefined in AccFlex constructions software between the company and the payment certificate for the subcontractor can only select the executed items and once determining the percentage of completion can prepare the payment certificate for the subcontractor, as the software shows discounts automatically according to the contract between the company and the owner and based on the predefinition of the subcontractor from the configuration/settings screen to make the payment certificate is accurately and as quickly as possible.

3- The ability to link the contract with the owner's payment certificate

The best accounting software for construction business (AccFlex constructions software)  is characterized that when recording the owner's payment certificate does not need to re-enter the work items, but there is a link between the contract line items predefined in AccFlex constructions software between the company and the owner can only select the executed items and once determining the percentage of completion can prepare the owner payment certificate, as the software shows discounts automatically according to the contract between the company and the owner and based on the predefinition of the owner's contract from the configuration/settings screen to make the preparation and review of the payment certificate is accurately and as quickly as possible.

4- Contractor Summary Report

The best accounting software for construction business (AccFlex constructions software)  is characterized by the presence of a report that shows you the contractor’s payment certificate and also the owner all its details, allowing you to review the payment certificate and then avoid mistakes in costs or revenues by making the balances of accounts receivable and subcontractors as accurate as possible.

5- Customer Balance Summary Report

The best accounting software for construction business (AccFlex constructions software) is characterized by the presence of a report that shows you a payment certificate of the customer and all the transactions of the customer and all the cash payments in a way that shows the customer’s balance all its details and makes the accounts receivable as accurate as possible.

6- Project Summary Report

AccFlex Constructions Software is characterized by the presence of a report that shows all the transactions recorded to the project of costs and revenues, similar to the project income statement, and helps in controlling and decision-making functions for the project.

7- Detailed Project Report

AccFlex Constructions Software is characterized by the presence of a report that shows all the actual and planned costs and the cost variance in a way that helps the management in planning functions, to analyze the causes of variances and treat them.

Expense Items construction companies

Construction companies' expenses can be divided into two types, costs for the project itself, called (construction costs), and expenses incurred by the company as a result of administrative and supervision functions (general and administrative expenses).

It can be divided as follows:

Construction Costs

These are all the costs incurred by the construction company for the project implementation and thus generate the revenue as project workers and engineers’ salaries and project staff as well as the purchases of required materials for project implementation and indirect expenses for the project.

General and Administrative Expenses

These are the expenses incurred by the company to complete the functions of supervision and decision-making

They are mainly indirect costs that the company paid and then allocates to projects (cost centers) with its proportion of each project such as administrative staff salaries- finance department- senior management- procurement department- warehouse- utilities expense administrative office- rent of the administrative office- depreciation of the company's fixed assets ... and other of indirect expenses.

It is worth mentioning that often the general and administrative expenses are not allocated to the project (cost centers) accurately and then a cost miscalculation occurs and it is believed that the project has gained profits when in fact it has incurred losses and we can avoid such mistakes in costs estimating by using construction accounting software that allocates the expenses items of construction companies automatically to projects (cost centers) making the project cost as accurate as possible and thus facilitate the decision-making function on the project as well as helps in preparing budgets for similar projects when preparing the financial feasibility study for them.