EQUIPMENT COSTING FOR CONTRACTORS
to download/view this document in pdf format, click here Construction contractors typically code their expenses into three main categories: direct job costs, indirect job costs and general and administrative expenses. The accounting pronouncements of Statement of Position 81-1 (Accounting for Performance of Construction-Type Contracts) indicate indirect costs related to contracts need to be included as part of the costs associated with jobs. In order to properly expense indirect costs to jobs, a systematic and rational method of allocation must be used by the contractor. One such indirect cost that requires allocation is a contractor’s equipment costs. These costs include depreciation, repairs and maintenance, fuel, shop costs, equipment insurance and other associated expenses of equipment ownership. Having a system in place to accurately accumulate equipment costs is essential to allow for proper cost allocation. Many construction companies use accounting systems that have equipment costing modules to assist in accumulating these costs, while others use separate methods and spreadsheets to account for the actual costs incurred. Allocating costs in a systematic manner applied on a consistent basis is imperative to maintaining accurate information for work-in-progress calculations and a clear reflection of company reported income. Although there is no one correct or incorrect means to distribute equipment expenses to the individual jobs, the following are most common - ¨ Blue book rental rates – according to the blue book rental rate or percentage of the stated rate, the job is charged with an hourly, daily, weekly or monthly amount for the use of specific pieces of equipment. ¨ Internally developed rental rates – similar to the blue book rental rates, however the contractor uses the company’s own developed rate to charge the job for specific pieces of owned equipment. ¨ Operator labor hours – an individual’s time is burdened to include the cost of equipment that individual is operating on the job. At the end of each year, an analysis of the equipment costs incurred and the costs charged to jobs will indicate an under or over allocation. This difference is considered a direct cost and should be included as part of the computation in determining gross profit for the company. Continued excessive under and over allocations may require the company to review and modify its methodology of equipment costing. A well designed and maintained system for equipment costing will not only provide an accurate reporting of company earnings and job cost reporting, but also supply management with other useful information. These include knowing your actual costs for bidding purposes, providing information for the most advantageous methods of reimbursement under cost plus contracts, allowing for buy new vs. repair old equipment analysis and lease vs. buy analysis. If you would like assistance with your equipment costing or want additional information please contact our firm at (425) 454-7990. Stein Larsen, CPA Principal
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