Accrual Method

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From the course by Columbia University

Construction Cost Estimating and Cost Control

447 ratings

Columbia University

Construction Cost Estimating and Cost Control

447 ratings

Course 3 of 4 in the Specialization Construction Management

This course introduces the types of cost estimation from the conceptual design phase through the more detailed design phase of a construction project. In addition, the course highlights the importance of controlling costs and how to monitor project cash flow. Students will work on a break-even analysis of construction tasks in a project.

From the lesson

Project Cash Flow

Ben Miller, Project Manager at Gilbane Building Company, discusses contracts and cash flows. Revenues, expenses and how they impact projects as a whole will be covered.

Cash Flow Method14:16

Accrual Method8:11

Contractor Cash Flow6:51

Charting Cash Flow3:30

Calculating Billing7:29

Payment Cycle6:56

Payment Cycle Drivers5:57

Payment Cycle Delays12:34

Meet the Instructors

Ibrahim Odeh, Ph.D., MBA
Instructor, Department of Civil Engineering and Engineering Mechanics, Columbia University
Director of Research and Founder, Global Leaders in Construction Management

So now we're going to look at the Accrual Method.

We're going to go ahead and clear this off the board.

And we'll do the same exercise over here.

So we're going to go ahead and create our chart.

About the same level.

We're going to create the same fields over here.

So, we have daily revenue,

Total revenue, Daily expense.

Total expense, Daily

capital, Total capital.

Of course we need to fill in the days of the week.

And our values.

Go ahead and connect these.

Create our chart.

All right, so we have our chart.

We know our revenues, we know our expenses, now we need to fill this in.

But, we talked about accrual accounting earlier, and what we say?

Accrual accounting recognizes your revenues as they're earned.

All right, so we earn $140 every two weeks.

Now let's assume that we work ten days, right.

We work Monday through Friday.

So, we have revenues,

$14 a day.

Now, our expenses are $42 a week, there are seven days in a week.

So we're going to see,

Expenses totaling $6 a day.

So now we have to fill in our chart.

It gets a little bit more complicated, doesn't it?

So, $14 a day.

Days we're going to earn $14 are Monday, Tuesday,

Wednesday, Thursday, Friday, both weeks.

So now we need to fill in our daily expenses.

Now rent really is just constant, right?

$6 every day.

And knowing this, we can fill in our daily capital.

So the first day is a weekend.

We aren't working, but we are paying rent so we're losing money.

From then on during the week, we see positive cash flow every day.

We still have this $6 loss on the weekends.

So now let's go ahead and finish filling in the chart.

$0 in revenues on the weekends.

I'm filling in our totals.

I'm not going to walk through this again, it's the same process we had.

Previous value plus today's value will be our total.

And total capital,

you can see here,

actually becomes

a positive number

on our second day.

Forgot to fill in this last day here.

It makes a difference, right?

So now you might be looking at these two charts and saying,

well, Ben, our total revenue is the same.

Our total expenses are the same and our total capital is the same.

That's true, it's true.

You end up in the same place, but let's go ahead and

chart this and see how it looks different.

So we're going to go ahead and look at it.

We'll do the same thing.

So our daily revenues go zero on the end

of the day Sunday, we still won't have any revenue, so we'll be down here.

And then we're at a constant slope up until the end of the day Friday when

we have $70.

So, that's here on Friday and we can just go ahead and connect those two dots.

Over the weekend, our revenue goes flat.

So we're still at $70 at the end of the day, Sunday.

And then, finally.

Next Friday we'll have another positive slope up to $140.

And another flat line on the weekend, right.

So, that's our revenues.

That makes sense, right?

You're constantly earning money on the week, nothing on the weekends,

and then another constant gain.

Now how about our expenses?

It's the same thing right,

starting at time equals zero we're just going to see a constant slope.

Every day, constant slope of $6 per day.

Up until a total expense of about $84, so right about here, right?

Right about here.

So we can see right here this is our debt.

Right, only dealing with that for the first day of this whole idea.

The rest of this time

We're seeing positive capital.

That sounds great, right?

This chart definitely looks far more optimistic than this chart.

And it is, but, what's the difference with these two?

Which one should we look at more?

Well, let's think about this.

Let's say we got to the end of the first week and we worked five days, right?

Hey, we're here.

Or we're here.

We really want to reward ourselves.

Let's go get a nice dinner.

So if we're following the accrual method over here we're

going to say hey look it's Friday.

Hey, I've got $34, I'm going to go buy dinner.

You go to the restaurant, you buy dinner.

When it comes down to it you don't actually have the money.

And that's the problem.

So accrual is a generally accepted accounting method.

It's fine, companies use it all the time but for what we're doing,

we're going to think about revenue.

Revenue especially.

As cash, because that's when it's real, when it's received and

in your hands is when you can use it.

And cash is a tool that helps drive projects forward.

All right so now we're going to really talk about what we care about,

contractor cash flow.

We need to understand revenues, expenses, where they come from, and

how they're processed.

So we're going to start with the basic project structure.

I'm going to draw it up here so that we can reference it for the rest of the time.

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