Construction company owners and financial executives face one issue every day: when to account for job costs as costs associated with a particular job versus as fixed assets. Because most contractors use the percentage-of-completion method in recognizing revenue and monitor the progress of jobs based on actual costs incurred, the accumulation of job costs is critical. 

The dilemma stems from when the job is initially planned and a budget is developed, which takes into account all costs to be incurred for that particular job. Intuitively, it seems that the initial budget should drive the decision whether to designate the associated costs as job costs. But in reality, the decision should be based on the accounting principles that provide guidance in this area.

Currently, the construction industry guidance on this issue is located in the Accounting Standards Codification 910, which addresses costs such as small tools, fixed assets and depreciation related to fixed assets, as well as general and administrative expenses. These items are identified as either direct costs (e.g., materials, direct labor and subcontracts) or indirect costs allocated to a job (e.g., depreciation, indirect labor, rent and utilities).

Generally accepted accounting principles state that a cost incurred specifically for a job with no other use beyond that job should be included as a job cost. So, what does that mean? If that item will only be used in that specific job, then it should be categorized as a job cost. Conversely, if it can be reused in other jobs, then it may be more properly categorized as a fixed asset rather than a job cost.

One clear exception within the guidance is that small tools are to be included in job costs as they are consumed. But what is a “small tool,” and what dollar amount defines it? Most contractors establish an accounting policy around a dollar threshold for capitalizing a reusable item as an asset and expensing items below that amount. This serves as a basis for identifying a small tool that may be charged to a job directly. Or, in the case of a capitalized small tool, the contractor may allocate the related depreciation directly to a job or a rental rate for the period of time used during that job. Common examples include hand tools, power tools and air tools.

Potential errors occur when tools or other items are being purchased and used for one construction job, but are then reusable later on other jobs. For instance, a company purchases 30 tools costing $800 each for Job A, and it has established a dollar capitalization policy of $500. Keep in mind, these particular tools were purchased specifically for Job A. In following the company’s accounting policy, the tools should have been capitalized and the related depreciation or an established rental rate for usage should have been allocated to the job (e.g., $24,000 for 60 months of expected life multiplied by two months of usage totaling $800 to be allocated to Job A). The mistake happens when the company includes all of the costs in Job A, resulting in:
  • an overstatement of job costs totaling $23,200 ($24,000 minus $800); and
  • the acceleration of revenue recognition under the percentage-of-completion method.
Sometimes the concept related to fixed assets versus job costs gets confused with the guidance related to using materials unique to a job, which cannot be used on any other job. In that case, those specific materials are charged as job costs to that particular job. 

Improperly distinguishing between what is a fixed asset and what is a job cost can severely impact a construction company’s finances in many ways, including potentially misstating revenue and costs along with the related work-in-progress assets and liabilities. There also can be a potential impact on cash flow as the jobs are billed. This demands that construction companies have proper accounting policies in place.   


Donna Caruso is the construction and real estate sector leader for Windham Brannon, PC. For more information, visit www.windhambrannon.com.