Ch. 2 Construction Accounting Fundamentals 101

Schedule of Values (SOV)

A detailed breakdown of a contract into individual work items, each with an assigned dollar value.

Example: A $1M electrical subcontract might have:

• Rough electrical: $300K

• Electrical finish: $300K

• Equipment: $250K

• Testing: $150K

Together, the SOV equals $1M.

Completed Work

Work that has actually been performed and can be included in a payment application.

Example: If the electrician has completed $200K worth of the electrical scope, that work can potentially be included in the pay app.

Stored Materials

Materials purchased for the project but not yet installed. Depending on the contract, these may be eligible for billing.

Example: The subcontractor purchases $100K of HVAC equipment that is being stored for later installation.

Work in Place

Physical construction work that has actually been completed at the project site.

Example: The subcontractor has installed 80% of the building's electrical conduit.

Percent Complete

The estimated percentage of contracted work that has been completed.

Example: A $1M subcontract has $400K of eligible completed work, so it is approximately 40% complete.

Current Period

The specific period covered by the current billing.

Example: "Current Period: April 1–April 30."

Previous Applications

Pay applications submitted during earlier billing periods.

Example: Pay App #5 shows $500K billed previously through Pay App #4.

Total Completed

The cumulative value of work completed through the current billing period.

Example: The subcontractor has completed $700K of work over the first six months of the project.

Amount Due

The amount currently owed/payable after applicable deductions.

Example: $200K of work is being billed, but $20K is retainage, so $180K is currently due.

Balance to Finish

The amount of contracted work that remains to be completed.

Example: A $1M subcontract is 70% complete, leaving approximately $300K of work remaining.

Payment Application Number

The identifier assigned to a particular pay application.

Example: "Pay App #7."

Billing Period

The period during which the work being billed was performed.

Example: "Work performed from May 1 through May 31."

Accounts Payable (AP)

Money that your company owes to another party.

Example: A subcontractor sends the GC a $100K invoice. From the GC's perspective, that $100K becomes an AP obligation.

Memorize: AP = I owe you.

Accounts Receivable (AR)

Money that another party owes your company.

Example: The GC bills the owner $500K. From the GC's perspective, that $500K is AR.

Memorize: AR = You owe me.

General Ledger (GL)

The central accounting record where a company's financial transactions are ultimately recorded.

Example: An AP payment to a subcontractor eventually gets reflected in the company's GL.

Chart of Accounts (COA)

The organized list of accounting accounts used to categorize financial transactions.

Example: A company might have accounts for construction revenue, subcontractor costs, payroll, rent, cash, and accounts payable.

Credit Memo

A document or accounting transaction that reduces the amount a customer owes.

Example: A vendor overcharges a GC by $5K and issues a $5K credit memo.

Debit Memo

A document or accounting adjustment used to increase or otherwise adjust an amount owed, depending on the accounting workflow.

Example: A customer may issue a debit memo to indicate an additional amount they believe should be charged.

Journal Entry

An accounting entry used to record or adjust a financial transaction in the accounting system.

Example: An accountant makes a journal entry to record an accrued project expense.

Accrual

Recording revenue or an expense when it is earned or incurred rather than waiting for the cash to move.

Example: A subcontractor performs $100K of work in December but doesn't get paid until January. The December expense/revenue may still need to be recognized in December under the applicable accounting rules.

Prepayment

Money paid before the related goods or services have been received.

Example: A GC pays a vendor $20K upfront for materials that will be delivered next month.

Expense

A cost incurred by a business.

Example: Payroll, materials, subcontractor costs, rent, and software expenses.

Revenue

Money earned from providing goods or services.

Example: The GC earns revenue by performing construction services for the owner.

Asset

Something economically valuable that the company owns or controls.

Example: Cash, equipment, accounts receivable, or property.

Liability

An obligation that the company owes to another party.

Example: Accounts payable is a liability because the company owes money to vendors or subcontractors.

Equity

The owners' residual interest in a company's assets after liabilities are deducted.

Simple formula: Assets − Liabilities = Equity

AP Aging

A report showing outstanding amounts the company owes, usually grouped by how long they have been unpaid.

Example: The GC sees that it owes $100K that is current, $50K that is 30 days old, and $20K that is 60 days old.

AR Aging

A report showing amounts that customers or owners owe the company, usually grouped by age.

Example: The GC sees that the owner owes $500K, including $200K that is more than 60 days overdue.

Bank Reconciliation

The process of matching a company's accounting records against its bank transactions.

Example: The accounting system says a $100K payment was made, and the bank statement confirms the $100K left the account.

Period Close

The process of finalizing accounting records for a particular accounting period.

Example: At the end of the month, the company closes April's books after recording necessary revenue, expenses, accruals, and reconciliations.