Avoid Trailing Punch-Out Costs to Close the Book on Finished Projects

Posted on Monday, July 09, 2018

Customer relationships with general contractors or owners who give your firm regular work can be like family relationships. One specialty subcontractor remarked about his work relationships that, "You will be spending more time with me in a week than you do with your family!"

Problem is, the more you and your staff "feel close" to your customers, the more they can exploit your generosity by asking your team to do tasks such as:

The amounts that accumulate in this way can be staggering.

Finish up a parapet as a favor;
Repair a crack (even though you didn't cause it); or
Build an extra section "as long as you're here."

You are asked to do this work even though it does not fall within the scope of the job or is listed on project documents. The work has not been negotiated up front, and was not included when the original estimate of cost was figured and your job was priced.

Bookkeepers, office managers, payroll coordinators and project managers often compound the problem without knowing it. That's because in their minds, jobs are expected to start and finish in one effort ... one complete motion.

If, therefore, a cost appears on a job that has been "finished" for several weeks, the bookkeeper or office manager may look askance and say, "That old job? So-and-so probably meant to put the cost on this new job for that same customer."

Hence the cost gets miscoded and never gets recognized as belonging to the punch-out stage of the project it pertains to. And if these costs are not getting properly recorded, they are not getting recognized by those people who make project management and cost estimating decisions.

The amounts that accumulate in this way can be staggering.

Ultimately there is a danger of costs being miscoded because these "late hits" to projects don't make sense to the people recording the transactions. But there is also a tendency for project managers and executives to let projects "fall off the radar" for reporting purposes as soon they finish.

In other words, completed jobs are no longer monitored on the weekly project performance reports because they are considered "done" and no longer relevant. So any costs that are going to hit these projects are lumped for cost management purposes into that one killer all-inclusive word: negligible.

Track Punch Out Costs as a Separate General Ledger Account

Most job cost systems have construction cost codes which correspond to costs such as materials, equipment rental, and subcontractor costs. These cost codes are different from the General Ledger expense accounts.

For example, the General Ledger might have an account for materials and an account for job-site labor, while the cost code might specify more detailed cost information. For example, a cost code might reveal whether the materials cost was for a specific trade, if more than one trade is involved, or whether the labor cost was for salary or it was for benefits.

Having the construction cost codes as a deeper level of cost data on projects is excellent. However, even if your firm doesn't do that — and just uses good old fashioned job numbers with the General Ledger — then keeping track of your punch-out costs can be quite helpful.

The major distinction should be made when tracking punch-out costs. When a final bill has been made on a project, or when it hits substantial completion, any costs that come in now have to be coded to warranty expense. That goes for:

Materials costs;
Subcontractor payments;
Equipment rental costs; and
Payroll costs.

Moreover, warranty expense can be a General Ledger account, which would then be further broken down into the different subcategories. Or it can be a separate identifying digit in the construction cost code if your firm utilizes a construction-specific software package which allows for it.

In either of these cases, the designation for warranty expense — as opposed to a standard project expense — should be made on a project level. Therefore, all warranty expenses can be summarized and reported to your senior management:

By job;
By subcategory of expense; or
In total.

Summarizing and reporting warranty costs in this manner will tighten up your bookkeeping for projects, by alerting your office and project staff that you are looking for these trailing costs, and that they are important.

Perhaps even more significant is the point that, tracking your punch-out costs more accurately and explicitly will help your project managers and executives better manage your firm's projects.

If you would like help setting up your construction cost codes list, or setting up warranty cost tracking and reporting, ask your accounting or tax advisor.

Posted in Construction Industry

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.

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