Teaching Assistant, Ph.D. Candidate Cristina GHINEA, Teaching Assistant, Ph.D. Candidate Camelia CHIRILA
Constantin Brancoveanu University, Piteşti [email protected], [email protected]
Abstract: The activity of construction assembling is essentially differentiated from other industrial branches as it is developed in the open air, being subject to all kind of unfavorable environmental factors.
The construction contracts include providing services associated both with constructing the actives (design), and with dismantling or demolishing them and restoring the environment. Due to the particularities of this type of activity, the construction contracts include: costs awarded directly to the contract, costs awarded to the contract activity and allocated to the contract, further costs specified in the contract and are in the beneficiary’s duty. The construction assembling works also have an important role in the complex exports.
Keywords: construction contract, fixed-price contract, cost-plus contract, incomes, costs.
The realization of an important number of construction works, yearly planned at higher and higher levels, cannot be the result of as seasonal activity, interrupted or slowed down by the cold climate, but only as the result of a continuous activity, developed all the year round.
While the industrialization increases, the construction field enlarges its activities, people make more complex constructions and they use more complex equipment whose continuous usage becomes very important all the year round. Even in the case of a high level of industrialization, the activity of construction assembling is essentially differentiated from other industrial branches as it is developed in the open air, being subject to all kind of unfavorable environmental factors.
Some special issues appear when the weather gets cold, forcing the company to take some special measures or to ensure specific technologies for the rest of the year, whose usage is required for the rest of the year and which influence the economic results of the construction assembling company. The result of the production process in construction assembling is the
"construction" which is realized through a series of works developed successively or concomitantly consisting of simple and complex technological processes.
The simple technological processes can be:
> Preparation processes: land clearing, marking, suspending, bordering, casting;
> Processing processes: concrete preparation, mojar preparation, trimming;
> Transportation of: materials, semi fabricates, prefabricates;
> Execution processes: masonry, prefabricates assemblage
The complex technological processes result from the combination of the simple technological processes. The construction works result from the combination of more complex technological processes (casting, reinforcement, concreting).
Cristina GHINEA, Camelia CHIRILĂ
The industrialization of the construction assembling works is a process in a continuous evolution, but the constructor’s direct intervention is required (as a good manager) and concretized in:
− centralization within their production bases of some material-processing actions (sorting the aggregates, making some boards, welded nets and metallic constructions) or some specific activities (concrete preparation, trimming, pre-packaging of concrete shields).
− execution processes in order to pre-fabricate some elements that cannot be produced in industry (as their series is reduced).
− activities regarding the production of some devices needed to complete the technological flow.
The main climate factors determining the development of the assembly construction works are the low temperatures, the rains preceding the frozen climate, followed by the snow which rapidly alternates with the snow melting.
They influence both the equipments’ and the workers’ efficiency, and the quality of the executed construction as well as the equipments’ and the workers’ security. Consequently, if the adaptation of the execution technologies to provide construction efficiency is not possible, it becomes compulsory to interrupt the respective works.
The construction contract is, in accordance with the international accounting standards, a negotiated contract particularly to construct one active or a combination of actives which are interdependently linked regarding the design, technology and their final purpose.
Construction contracts can be:
• the fixed-price contract – it is the contract in which the constructor agrees with the contractual fixed price or with fixed rate per finished product unit, which, in some cases is the subject of the prices deviation clauses;
• the cost-plus contract – it is a contract in which the constructor recovers the allowed costs or in other way defined, plus a percent from these costs or fixed fee.
Some contracts include characteristics belonging both to the fixed-price contracts and to the cost-plus contracts.
The construction contracts include providing services associated both with constructing the actives (design), and with dismantling or demolishing them and restoring the environment.
When a contract covers a certain number of actives, the construction of each active must be treated as a separate construction contract if each of them was submitted to a separate negotiation, and the costs and the incomes may be identified.
A group of contracts must be treated as a separate construction contract when the following conditions are fulfilled:
the group of contracts is negotiated as a single package;
the contracts are tightly connected as part of a single project with a global profit rate;
the contracts develop simultaneously or in a continuous sequence.
Constituting another active must be treated as a separate contract when:
the active differs significantly as design, technology;
the price of the active is negotiated without taking into account the price of the initial contract.
The contractual costs must include:
costs awarded directly to the contract;
costs awarded to the contract activity and allocated to the contract;
further costs specified in the contract and are in the beneficiary’s duty.
The costs awarded directly to the contract include:
a) the costs of the power-man on site (including supervision);
b) the costs of the used construction materials;
Influence of the Construction Assembling Activity upon Costs and their Calculation
c) the amortization of the technical machines and equipment;
d) the costs of transporting the technical equipment and the materials to and from the site;
e) the cost of the technical equipment and devices;
f) the costs for designing and technical assistance awarded directly to the contract;
g) the estimated costs for the correction and for the guarantee and insurance works h) the debts to third parties.
The costs awarded to the contract activity in general and which can be allocated to specific contracts include: insurance, costs for designing and technical assistance, indirect construction costs.
The costs not awarded to a construction contract or which cannot be allocated to this are excluded from the costs of a construction contract:
− the general administration costs for which the reimbursement is not specified in the contract;
− the selling costs;
− the research and development costs for which the reimbursement is not specified
− in the contract;
− the amortization of the technical machines and equipment which are not used according to the contract.
The contractual costs include the costs associated to a contract from the beginning to the closure of the contract.
The construction assembling works also have an important role in the complex exports.
Similar to the operations of exterior cornet regarding the materials exchange, the execution of construction assembling works abroad can be made on the company’s own or in commission.
To realize the construction assembling works, on its own, the exterior commerce companies constituted abroad various subunits without legal liability which develop their activity according to the principles of the functional and financial autonomy, on the basis of activity programs and budgets of incomes and expenses.
They respond of the integral execution of works at the contracted terms, of the quality of these works and the judicious usage of the labor force and of the material base.
The general contractor is the exterior commerce company, which, in order to reach the construction assembling objectives, closes at internal level some commercial contracts with subcontractors, Romanian or foreign economic agents, specialized in designing works, construction assembling, production of materials, equipment, parts, and providing services.
Without legal liability, the foreign subunits do not have external economic and financial relations and do not keep the accounting of the activity if in the respective country there are more objectives accomplished; the task to effectuate the clearing with the external beneficiaries, with the economic unit in the country and to keep the accounting of their activity belongs to the coordinating (accounting documents are drafted up to the level of the verification balance).
According to the construction assembling works effectuated abroad, in commission, there are two types of contracts: contracts for commission, closed between Foreign Trade Company (FTC) and the construction assembling unit in the country and external contracts closed between FTC and the external beneficiaries. The internal contracts are closed on behalf of FTC, but the risk is taken by the construction assembling units.
FTC participates at the execution of the construction assembling works abroad, as general contractor, and the foreign subunits subordinated to FTC and the construction assembling unit as executants.
But as we mentioned the activity developed in commission, all the expenses for the execution of the works are covered by to the construction assembling units. They recuperate the expenses from the price taken from the external beneficiaries through FTC.
Cristina GHINEA, Camelia CHIRILĂ
The expenses of FTC have a general administration and management character and their main financing source is the commission retained to the construction assembling unit from the external price.
The expenses made with the execution of the construction assembling works in commission are effectuated as follows: the foreign subunits effectuate external expenses in the local currency.
The financing source is that part of the external price collected in local currency by the subunits as an advanced payment and previously after the execution of the works. Separately, the subunits have their own administration and management expenses which obtain as financing sources the foreign currency sums collected by FTC from the commission of the construction assembling unit from the external price.
FTC effectuates its own administration expenses which are financed from the commission retained from the construction assembling unit. The construction assembling unit effectuates its own expenses with foreign works as follows: external expenses in local currency (through FTC) financed from the external price collected in local currency; the internal expenses in lei, effectuated in the country whose financing source is the external price collected in convertible foreign currency.
The main issue of the construction contracts accounting is the contractual incomes and costs allocation. In accounting, when recognizing the incomes and the expenses corresponding to the construction contracts one can use two methods:
• The method of the finalization stage (or percentage down payment/advanced percentage);
• The method of works finalization.
While the method of the finalization stage answers to the connecting principle with the incomes, the method of works finalization corresponds with the cautious spirit which we have to take into account. The chosen method has an influence over the evaluation of the works in progress, at the exercise closing.
Through the method of works finalization, the works stock figurates at the production cost for the performed works, diminishing with the intermediary invoicing, while through the applying of the advanced percentage, the value of stock includes a part from the benefits, part in proportion with the performed works.
CONCLUSIONS
International Accounting Standards (IAS) 11 rules specify that any time the contract result can be realistically estimated, and the method which has to be used is the one of the advanced percentage. The conditions which have to be fulfilled based on the contracts with fixed prices and also on the contracts in overhead, were specified at “contractual incomes”. Also the rule IAS 11 specifies that, when the conditions are not fulfilled the contract result also can not be estimated in a credible/realistic way, has to be applied the method of works finishing. If further, the uncertainties regarding the contract were diminished very much, one has to use the method based on the percentage of work advancement method.
REFERENCES:
1. CECCAR, Guide for International Standard for Accounting Understanding and Applying, Bucharest, 2004.
2. IASB, International Standards for Financial Reporting (IFRS), Translation in English, CECCAR 2005.
3. Popa A., Pitulice C., Nichita M., Jianu I., Practical Studies regarding the Application of the International Standards for Financial Reporting (IFRS), Conta Plus Magazine, Bucharest, 2007.
Scientific Bulletin – Economic Sciences, Vol. 9 (15) - Accounting, Statistics and Financial Analysis -