Last Word

________________________________________________________________________________________

American Council of
Engineering Companies
(formerly the American
Consulting Engineers
Council)

Volume XXII, Number 15
July 13, 2001

1015 15th Street, NW
Washington, DC 20005
202-347-7474
Fax 202-898-0068
www.acec.org

E-mail acec@acec.org

Francis George, Editor
___________________

GA Report

This week's edition:
July 13, 2001


 ACEC Means
Business

Accounting Methods

There are several methods for recording accounting transactions, but the most important are cash and accrual. The cash method of accounting records entries at the time they affect cash. For example, revenue is recorded when checks are received from clients, and expenses are recorded when the cash is paid out. Transactions that do not affect cash, such as recording accounts receivable, are generally ignored. This is a very simple method of accounting and is easy to explain.

The problem with cash accounting is that it does not match income with expenses. Cash expenses, such as salaries and vendor bills, are generally paid shortly after the obligation is incurred. However, income for work accomplished is generally not received until the following month or even later. Thus, under the cash system of accounting, revenue and expenses do not match. The information reported is therefore not very meaningful, because it does not answer the basic question of an income statement, that is, whether the firm made or lost money in that reporting period.

A hybrid system of accounting incorporates a greater amount of information because it employs a combination of cash and accrual. However, hybrid systems are not much more satisfactory than cash systems from a management standpoint.

The most satisfactory system to use is the accrual system of accounting which records income when earned and expenses when incurred. For example, when labor and expenses are applied to a project, the revenue earned is shown as income in the month that it is performed. This means that income is shown before it is received. The drawback, of course, is that the firm may not collect for that income. In that case, the income must be eliminated or written off as soon as the bad debt is discovered, which may be several months after it has been shown on the books. Expenses are recorded in the accounting period when they are incurred rather than paid. For example, if certain vendor invoices apply to the period, but for some reason are not paid until a later period, they are entered into the current records as accounts payable to match them against the appropriate revenue. Likewise, certain expenses that are paid in advance, or prepaid, are spread or allocated over the entire period to which they apply, such as insurance premiums paid annually.

Another advantage of the accrual system is that a firm’s revenue earned but not yet billed (work in progress) and its billed revenue (accounts receivable) are recorded and shown as an asset on the balance sheet. By reporting these figures each month, the firm can see how much is owed to it and take steps to collect it.

Emphasizing the accrual method of accounting does not minimize the vital importance of cash and the need to closely monitor the cash position of the firm. It just means that cash is monitored by the use of other reporting methods. Proper management requires a reporting system that supplies both types of information, but the measurement of operating performance is best accomplished by means of the accrual method.

The percentage of completion method is used by most engineering firms to record revenue on lump-sum and "percentage of construction" projects. Percentage of completion refers to the status of projects. Income is recorded to the extent that work has been completed on current projects based on the amount of work yet to complete. It is an engineering estimate made by the project manager, based on number of drawings yet to finish, square footage left to design, hours of labor necessary to complete a report, etc. It should not be based on the amount of money left to spend on the contract. The remaining effort must, of course, be related to the funds left to spend, but the percentage of completion must be based on a technical evaluation of the project for the percentage to have any real meaning. Income is then recorded to the extent that work has been completed, and this is a true status of what has been earned on a project. For example, if the project manager says that the project is 30% complete, then that amount is recorded as revenue. If 50% of the funds have been spent, that is the cost of the job to date, and the difference represents the loss incurred so far.

Excerpted from Financial Management for Design Firms, by Lowell Getz, ACEC Publication #LW-322-00, $79 members, $99 non-members, $5 shipping. Orders should be sent to ACEC, FAX (202) 789-7220, by e-mail at publications@acec.org,or visit the ACEC website at www.acecc.org to purchase this online. Please include your Mastercard, Visa, or American Express number with the expiration date, contact name, firm name, street address, phone number, and e-mail address.

 

Seminars Offer Updates on 2001 EJCDC Documents

The Engineers Joint Contract Documents Committee (EJCDC) is an undertaking of the American Council of Engineering Companies (ACEC), the American Society of Civil Engineers (ASCE), and the National Society of Professional Engineers/Professional Engineers in Private Practice (NSPE/PEPP). EJCDC had developed and periodically updates a set of documents representing the latest and best thinking of practicing engineers and legal counsel on contractual relations between the parties involved in construction-related projects.

The EJCDC documents are standard contract documents utilizing carefully drawn language to define the respective responsibilities of the parties to construction-related projects based upon "test of time" experience. They are the industry model for professional engineering services and construction processes. The documents spell out accepted divisions of duties and responsibilities of the Engineer, Owner, and Contractor, and represent the culmination of legal precedent and expert review. EJCDC has produced the following documents: Construction Related Documents; Design/Build Documents; Owner/Engineer Agreements; Engineer/Subconsultant Agreements; Funding Agency Agreements; Procurement Related Documents; Commentaries, References, Multiprime, and Other Agreements; and Hazardous Remediation Documents.

This September ASCE, in partnership with ACEC and NSPE, will offer two important seminars on the EJCDC documents: "Using and Understanding Engineering and Construction Contract Documents" on September 17-18 and "Design/Build Documents" on September 19-20. Both seminars will take place in Denver at the Hyatt Regency Downtown Denver. These seminars will help you stay current on the latest EJCDC documents and learn how you should use them to keep projects on time and budget, avoid costly disputes and litigation, and enhance relationships with all the parties to construction related projects. Seminar participants will receive a complete set of the newly updated 2001 Construction Related Documents and/or the Design/Build Documents.

To register for the seminars or for additional information on the seminars or the EJCDC documents, call 1-800-548-2723. You also may register online at conted@asce.org. Registration fees are $845 per seminar for ASCE, ACEC, and NSPE members and $995 for non-members. Individuals who attend both seminars save 20 percent on the registration fees.

Are Peer Reviews REALLY Confidential?

Confidentiality is a top concern among principals considering an Organizational Peer Review (OPR). Releasing detailed company data or employee statements may well threaten a firm’s security or an employee’s career. Do the reviewers really keep information confidential? "YES!" answers Jeff Bennett, Chair, Peer Review Training. "I’ve personally completed 15 reviews and I can say that confidentiality has never been a problem. It’s something we stress in our training. The reviewers always sign a non-disclosure form and in our training we make sure they understand what that means and that the whole process is built on trust."

ACEC requires that a copy of the non-disclosure form be sent to the firm, the review team leader, and the Peer Review Administrator. "…the confidentiality and non-disclosure agreements entered into by the reviewers should eliminate any concern about confidentiality. I know of no case where there has been a breach of this trust," stated Paul Bucknam, in the American Consulting Engineers Council/Massachusetts' newsletter, INSIGHTS, (Feb/March 2000). Bucknam is a former Peer Review Committee member who has served on over 25 OPR review teams.

If you have questions on the Peer Review Program, contact Anna Johnson (ajohnson@acec.org, 202-682-4349).

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