AC-Amount Committed

SC $30,000 (subcontract to B & B Masonry)

+

ETF $2,000 (Estimate to Finish, window/door lintels)

+

PCO $1,000 (Potential Change Order, B & B claim)

=

ET $33,000 (Expected Total)

AC-Variance

SOV $34,000 (Schedule of Values)

-ET $33,000 (Expected Total)

=

VAR $1,000 (Variance)

D-Spent Variance

DS $7,500 (Dollars Spent, Project to Date, negotiated)

DL $26,500 (Dollars Left, Project to Date, SOV-DS)

PS 22.06% (Percent Spent, Project to Date, DS/SOV)

Here is how the model works: The budget for masonry (4200) is $34,000. The goal is to keep committed costs less than the budgeted costs. If committed costs are greater than the budgeted costs, you are over budget, meaning, that you are going to lose money for this line item.

Budgeted costs should be equal or less than AC: Amount Committed plus ETF (Estimate to Finish) and PCO (Potential Change Order). This is totaled in ET (Expected Totals) then deducted in AC-Variance. This variance is much more important than the D-Spent Variance because it includes projected dollars to be spent.

Lets define the JCM acronyms:

JCM: Job Cost Model

Code: CSI line item number following the MasterFormat.

SOV: Schedule of Values or in other words the line item budget.

AC: Amounted Committed by signing a contract or issuing a purchase order or some other method that commits the line item to a certain dollar amount.

ETF: Estimate to Finish may come from misc. items not covered in a sub contract or it may be unexpected costs that are truly the cost to the general contractor.

PCO: Potential Change Order may be costs that you feel are in question and are not the responsibility of the general contractor. This is a cost that is under negotiation and may be the cost of the owner or a sub contractor. PCO lets you put it in a place where it will not be forgotten until negotiations can take place.

ET: Expected Total, Total of adding SCPOLO (SC:subcontract, PO:Purchase Order, L:Labor, or O:Other debit against the SOV)+EFT+PCO

AC-Variance: Amount committed subtracted from the line item budget. This is a better variance report because it includes ETF and PCO projected costs.

D-Spent Variance: This is the typical variance report that show actual dollars spent.

DS: Dollars Spent is actual money paid to date for the line item.

DL: Dollars Left is the actual money left in the line item account.

PS: Percent Spent is the percentage of the budget that has actually been spent to date. This is helpful to determine as a check that if the percentage spent seems to be equal to the percentage that is complete for the line item. If the percentage is too high then you may have a problem.

There are a few numbers in the model that you do not recognize. Assume that construction has begun and you are now two months into the project. ETF of $2,000 is the planned cost of the

$1,800 for the lintels plus an additional $200 for potential minor overruns that you are

anticipating. The PCO of $1,000 is for extra work that B & B Masonry wants to charge because they did extra work that was not clear on the drawing. You are preparing to present this to the owner for a change order. B & B masonry did not start of the project until the beginning of month two of the project. You received and approve the first payment (or draw) of their contract of $7500. This is a negotiated amount.

So what does the model tell us? First and most importantly is that the line item 4200 only has about $1,000 of cushion left in it. It is hopeful that you can get the additional $1,000 of the PCO either approved by the owner or get B & B Masonry to back off their request. All seems to be going pretty well with the masonry budget line but there is not any extra room in case of any problems.

Now, if you only looked at the dollars spent and the amount left in the line item to spent, would you have gotten the same information? Not even close! That is why it is so important to have a job costing system that allows for committed costs in addition to variance reports that just show what has been spent.

ETF and PCO are two excellent job cost forecasting tools that are included into the JCM that provide a much better picture for better job cost management. Self-check question 5 lets you work through a problem. There is one similar problem in the Quiz.

Concept 2: Job Cost Account Coding

Now that you have an understanding of budget line item setup and how costs are shown as either committed or actual payments are made, lets look at how entries can flow into the model. There are basically three ways that you can spend against the budget line item. They are:

SC - Sub Contract, You can write a sub contract.

PO - Purchase Order, You can write a purchase order for generally materials or purchasing or renting equipment.

L - Labor, You can hire your own employees or temporary help to perform labor on the project.

O - Other, is for other unforeseen financial purchases or commitments that don’t come through the above three methods. This is really a catch-all for mistakes made in the sub contracting and purchasing system.

(Put this all together it spells SCPOLO. I call this the sick polo method!)

So whenever you want to charge anything against a line item there is a transaction coding process that takes place. Every SC, PO, L and O is coded with a number that means something.

The code looks like this: (example: 016-2002-SC-4200)

Job Number, example 016 (This would be job #16 for that year or accounting period.)

Year, example 2002 (This would be the year that the job started. This is important because it can get very confusing from year to year. Some companies just continue to number their jobs year after year. One company I worked with was on job number 228 after eight years.)

Type of Debit, example SC, PO, L, O (This describes what type of instrument was used to charge against the line item.)

CSI Code, 4200 (This then identifies the exact line item that needs to be charged.) So, does this code (016-2002-SC-4200) make a lot more sense?

How this works is that different levels of employees have authority to commit the company (purchase SC, PO, L, O). Superintendents may have a $5,000 level authority, and project manager a $10,000 level authority etc. The truth is that generally every contract must be approved by a contract administrator at the main office and only certain people are approved to issue purchase orders. Often it comes through a central purchasing agent at the main office. The general rule is that any paper work such as a SC, PO, L, O will not be processed in any

accounting system without the proper signature approval and the correct coding. Also, generally no one is approved to request funds above the approved line item unless it is approved and signed by a vice president or president. They want to know about what we call “budget busts”

before and not after they happen.

So what about ETF’s (Estimate to Finish) and PCO’s (Potential Change Order)? They do not fit into a job cost accounting system because they are only estimates. I would suggest that these planning estimates be used in the Job Cost reporting system. I do not include them in the accounting numbers that are given to the accountants but they are included in all management reports. In the corporate business world, a business unit is often asked to project future costs for a certain period. It is called a flash report. That is what we are doing here is projecting future costs for a certain period.

This model is a little complicated. I suggest that you spent a little time in getting to understand it.

We will be building upon it in lesson 8 and using it in assignment 3.