Shell 2 - Financial Management Flashcards
What are the two basic levels of accounting?
Basic Accounting (General Ledger Accounting)
-and-
Project Cost Accounting
What are the aspects of Basic Accounting?
- Also called General Ledger Accounting
- Tracks of overall money coming in and out of the firm
- Includes day-to-day expenses, banking, and taxes.
- Provides an overall view of the firm’s financial health
What are the aspects of Project Cost Accounting?
- Tracks revenue, expenses, and profit on individual projects
- Strongly tied to the project fee and amount of time spent working on the project.
- Informs decisions on how to manage projects and allocate resources
- Gives insight into how to create accurate proposals for future projects
define: Accounts Payable
Money owed to suppliers of goods and services (EG consultants, printing, utility company)
define: Accounts Receivable
Money owed to you through invoices for your services.
define: Assets
Any tangible or intangible resource that can be measured monetarily. Includes things that the firm owns. EG: equipment, property, copyrights, cash, securities.
define: Chart of Accounts
A spreadsheet of accounts for the firm. Broken into categories (assets, liabilities, equity, ETC) and listed by account number (like and index)
define: Current Assets
Resources of the firm that are expected to be converted into cash within one year
define: Direct Labor
All labor of staff (technical, principal, support, ETC) that is directly billable toward a project
define: Direct Personnel Expense
The cost of having employees, including salary, benefits, and taxes
define: Discretionary Distribution
Voluntary distribution of profits to owners and non-owners (EG bonuses, profit sharing, incentive compensation)
define: Fixed Assets
Resources that the firms retains for a long period of time (EG equipment, property)
define: Gross Revenue
All the revenue generated by the firm over a given period of time
define: Indirect Labor
All labor done by the firm that is NOT billed directly to a project (EG marketing, administration, general office time)
define: Liabilities
Claims by people outside the business or by owners against the total assets of the firm (anyone you have to pay)
define: Net Revenue
Also Net Operating Revenue. The revenue remaining after deducting all direct project-related expenses (consultant fees, reimbursible expenses, non-reimbursible expenses, salaries, benefits) but before deducting non-project expenses (taxes, overhead, ETC)
define: Other Assets
Miscellaneous resources held by the firm (EG securities, copyrights)
define: Overhead
Expenses required to keep the firm running whether or not any revenue it being generated (EG rent, software leases, utilities)
What are the two basic methods of accounting?
Cash Accounting
-and-
Accrual Accounting
What are the aspects of the Cash Accounting method?
- Revenue and expenses are added to the spreadsheet at the time the firm pays or receives money
- Gives a better picture of the firm’s current actual cash flow
- Simpler; better for small or sole businesses
What are the aspects of the Accrual Accounting method?
- Revenue and expenses are added to the spreadsheet at the time they are earned or incurred
- Gives a better picture of the firm’s long-term financial health
- Helps with future firm planning
- Pretty much required for medium and large businesses (required by IRS for firms above a certain size)
What are the aspects of the Modified Accrual Basis of Accounting method?
- A slightly modified version of Accrual Accounting
- Does not add revenue that has been earned but not yet billed to the client
define: Journal
A chronological list of each transaction (money paid to or by the firm)
define: Ledger
A list of accounts (transactions grouped by their source) and summed up
What are the three types of Accounting Reports?
- Balance Sheet
- Profit and Loss Statement
- Cash Flow Statement
What are the aspects of a Balance Sheet?
- A type of Accounting Report
- Sums all the Assets and Liabilities of the firm
- Must equal zero, because the Net Worth and Owner’s Equity is counted as an asset
define: Net Worth
A firm’s total assets minus its total liabilities.
define: Owner’s Equity
The owner’s or stockholder’s money invested in the business (IE, money that the business has at it’s disposal that belong to the owner)
What are the aspects of a Profit and Loss Statement?
- A type of Accounting Report
- Also called an Income Statement
- Lists all the gains and losses of the firm for a specified period
- Includes thing like depreciation and investment growth
- More of an overview of the company’s status
What are the aspects of a Cash Flow Statement?
- A type of Accounting Report
- Lists the actual inflow and outflow of cash and Cash Equivalents
over a certain period - Does not include growth or loss that aren’t related to a transaction (EG depreciation, investment growth, ETC)
- Detailed view of company’s status
- Helps the firm determine their month-to-month financial health, for meeting monthly fees and payroll
What are the aspects of a Project Progress Report?
- More detailed report on cost of labor (hours), consultants, overhead allocated to the project, reimbursibles, and other expenses.
- Show current period and summarizes total to-date
- Compares these costs against the projections for the project
What are the aspects of an Office Earnings Report?
- Lists all the firm’s projects in terms of revenue generated and expense incurred
- Also usually lists unbilled services, percentage of completion, and profit/loss to date
- Helps the firm evaluate which projects are hurting the firm
What are the aspects of an Aged Accounts Receivable Report?
- Shows the status of all project invoices
- Shows whether each invoice has been paid and when it was originally invoiced
- Listed by when it is due
What is a Time Analysis Report?
- List each employee and how their time has been spent
- Number of hours spent on direct labor, indirect labor, and time off
- Helps generate the Chargeable Ratio for each employee.
What are the aspects of a Chargeable Ratio?
- Also called a Utilization Ratio
- Time spent on direct labor divided by total time spent on the the office (including vacation/sick leave).
- Can also be calculated using dollars instead of time
- Minimum ratio should be 65% to “break even”
- For technical staff, should be in the range of 75-85%
define: Net Profit Before Tax
- A Financial Ratio that shows the percentage of profit that came from the firm’s Net Revenue.
- Total yearly profit divided by net revenue
- Calculated before tax
define: Overhead Rate
Total office office indirect expenses (mostly overhead) divided by total office labor (people, hours, ETC). Should be in the range of 1.3 to 1.5. To estimate fee, multiply cost of direct labor by this ratio and then add to the cost of direct labor.
define: Quick Ratio
Same as the Current Ratio, but for the “Assets” only includes cash, cash equivalents, accounts receivable, and revenue earned but not billed. Is considered more conservative than the Current Ratio.
define: Revenue per Technical Staff
Total net revenue per year divided by number of technical staff (or staff working on billable projects).
define: Revenue per Total Staff
Total net revenue per year divided by number of staff. Can be used to estimate target net revenue or staffing needs for the firm.
What is a Billing Rate?
- The hourly fee for an employee working on a project.
- Includes the employee’s salary, cost of the employee’s fringe benefits, proportion of the firm’s overhead costs, plus and allowance for profit.
- Often simplified using the Net Multiplier
What is a Net Multiplier?
- Used as a simplified method of determining the billing rate
- Multiply this by the employee’s hourly pay to get the Billing Rate for that employee
- Net revenue (IE revenue minus cost to complete the work) divided by the cost of direct labor
- Usually between 2.7 and 3.0
What is a Break Even Rate?
- Used the same as a Net Multiplier to determine minimum billing rate
by multiplying by the employees hourly pay - Total cost of operations (salary + overhead per employee) divided by the total cost of Direct Labor
- Since the recommended Overhead Rate is 1.3-1.5, then Break Even Rate should be 2.3-2.5
What is a Direct Personnel Expense multiplier?
- Call the DPE
- Adds benefits (healthcare, time off, ETC) and taxes to the employee’s base salary for the purpose of calculating multipliers
- Also adds on a number for overhead and profit per employee
- Slightly lower than the Net Multiplier
- Not used as commonly as the Net Multiplier
What components must be included to produce an estimated fee?
- Estimated hours per employee type times that employee type’s Billing Rate
- Profit (if not already included in billing rate)
- Consultant fees
- Estimated reimbursible expenses
- Optional to factor in region / industry / client / ETC based on past experience
What comparisons can the firms perform to check their proposed fee?
- Past projects in the same region / industry
- Type of project and squarefootage
- Percentage of construction cost
What are the four tools for collecting account receivable?
- Terms in the contract
- Timely invoicing
- Thorough invoices
- Regular procedures for tracking accounts
What types of contract terms help facilitate billing?
- Clearly stated basis for the fee
- When invoices will be sent
- When payment of invoices is due
- Consequences for not paying invoices
- Cases for stopping work or withholding services
- Procedures for dispute resolution
What are the aspects of the Agent-Principal relationship?
- The Agent is person / entity who acts on behalf of a Principal when dealing with a third party.
- The Architect is an Agent for the Owner / Client.
- The Agent has agreed to act in the best interest of the client.
- Technically, the Agent is empowered to create a legal relationship between the Principal and a third party.
define: Vendor
A person or entity who supplies a specific product for a fixed price and is expected to act in their own best interest.
How / where are the duties of the Architect defined?
- In the terms of contract (written or oral)
- By law, whether in building code, licensing laws, or otherwise
- By implied duties (precedent)
What are some of the implied duties of the Architect to the client?
- Cooperating with the contractor
- Not interfering unduly with the contractor’s work
- Giving relevant information to the contractor promptly
- Assisting the owner in coordinating work
- Acting in the best interest of the client even in situation not defined in the contract
define: Liability
Possible legal responsibility for injury to another person or damage to property.
define: Negligence
Failure to avoid harming another per person or damage property. Established based on three conditions: 1) the existence of a legal duty between parties; 2) a breach of that duty; and 3) that the breach led to harm of a person or damage to property
How are Negligence and the Standard of Care related?
Architects are not expected to be perfect. Negligence only exists where the Architect violates the Standard of Card (the degree of skill and knowledge that another Architect would have shown in a similar situation). In order for a legal Duty to have been breached, the Architect must have violated the Standard of Care for that Duty.
What are three common defenses used when a claim is made on the architect?
- Betterment
- Statute of Limitations
- Statute or Repose
How is the concept of Betterment used to defend the architect?
The architect should not be liable for the full amount of a change order which was caused by their error / omission, but only the part(s) that were specifically caused by the architect’s mistake.
How is a Statute of Limitations used to defend the architect?
It is the time beyond which a claim cannot be made against the architect. It is usually 3 to 10 years in most States for construction claims, and can be different for breach-of-contract claims. For construction, it usually begins with the date of Substantial Completion.
How is a Statute of Repose used to defend the architect?
It is the time after discovery of any issue beyond which a claim cannot be made against the architect. Different in every State. The Statute of Limitations overrides the Statute of Repose.
What are some general ways of limiting liability?
- Don’t go into contract with a client who is unknowledgeable about construction, expects too much, has a history of poor payment practices, or has a history of litigation
- Use well-written contracts
- Assign appropriately experienced staff to manage and design the project
- Maintain rigorous quality control procedures, including checklists and peer-review.
- Establish well-defined objectives for each project.
- Use proven (time-tested) details and specifications.
- Make sure everyone at the firm working on the project understands the contractual obligations and their individual responsibilities
- Be very careful with last-minute changes / substitutions because they may have consequences that the architect doesn’t have time to consider
- Consult and follow the advice of your liability insurance provider
How do the mechanics of Privity and Indemnity work?
- They are legal concepts that theoretically protect the architect from claims by third parties
- Privity protects the architect from claims made by entities with whom they had no direct contract.
- An Indemnity Clause in a contract hold harmless the architect for damages, claims, and losses caused by the work of entities with whom they have not contract.
- The courts do not always honor these concepts, if it can be proven that action or lack of action by the architect was the primary cause for damages.
What are some ways of limiting specifically third-part claims?
- Don’t include language in the contract that makes the architect responsible for supervisions or coordination of construction (unless those are services specifically provided by the architect for this project)
- Do not dictate means or methods of construction.
- Report obvious safety problems to the construction supervisor and owner (in writing).
- If the contractor fails to correct safety issues or adhere to the contract documents, notify the owner and suggest to the owner that construction be stopped until they are corrected.
What are the two types of Copyright for architectural work?
Instruments of Design (drawings, renders, specifications, ETC)
-and-
Building Copyright (the form, arrangement, and visual representation of the building itself)
What are the aspects of the ‘Building Copyright’?
- Established by the Architectural Copyright Protection Act for buildings built after 1-Dec, 1990
- Covers the graphical representation of the building
- Covers the overall design of the building (form, arrangement, composition of spaces, building elements)
- Building cannot be replicated without the permission of the architect. This includes ‘Derivative Works’ which are substantially similar to the original building.
What are the general practices for handling Copyright ownership?
- The architect owns the copyright to the Instruments of Design and Building Copyright by default.
- The architect should state the ownership of the copyrights through terminology in the contract.
- The architect may solidify their ownership of the Building Copyright by registering a copyright withing three months of ‘publication’ of the project.
- The architect may transfer these copyright for these materials to the owner through terms in the contract or other agreements.
Under what terms does the architect allow the owner to use the Instruments of Design and Building Copyright?
- The architect technically licenses the owner to use these materials solely for purpose of constructing, maintaining, and altering the building.
- If the owner terminates the contract or if the architect terminates it due to owner’s suspension of the project, this ‘license’ is considered suspended.
What types of insurance is the architect required to carry by most contracts (including the B101)?
- Professional Liability
- General Liability
- Automobile Liability
- Workers Compensation
What are the common types of insurance that the architect MAY carry?
- Professional Liability
- General Liability
- Property
- Personal Injury
- Automobile
- Worker’s Compensation
What is Professional Liability insurance?
- Sometimes call Malpractice or Errors and Omissions insurance
- Covers the cost if the architect’s actions lead to damage to person, property or other.
- It does not include intentionally wrongful acts, claims for exceeding cost estimates, and claims regarding express warranties
What is General Liability insurance?
Can include different kinds of insurance that may protect the architect from damage caused by themselves, their employees, their consultants, or other people hired by the architect.
What is Personal Injury insurance?
Covers the architect for claims of slander, libel, defamation of character, misrepresentation, or other non-injurous wrongs.
What types of insurance is the owner required to carry by most contracts (including the A201)? What attributes should it have?
- General liability insurance
- Property insurance for the full value of the work, which covers damage to the building / work.
- It should be the “all risk” type of insurance (not the “specified peril” type), which covers all hazards except those that are specifically excluded.
- All-risk insurance should cover portions of the work stored off-site or in transit
- All-risk insurance should also cover the architect’s and contractor’s services and expenses that may be needed due to damage.
- The owner is also usually required to carry boiler and machinery insurance.
What types of insurance is the contract required to carry by most contracts?
- Worker’s Compensation
- Damages caused by bodily injury, occupational sickness, or death of employees.
- Damages caused by bodily injury or death of people other than employee.
- Personal Injury (slander, libel, false arrest, ETC)
- Damages other than to the work itself (such as liquidated damages)
- Damages related to use of motor vehicle and equipment.
- Damages to body or property arising from injury after the job is complete and the contractor has left the site.
- Contractual Liability insurance.
define: Current Ratio
Total Assets divided by total Liabilities. Metric for the firm’s current short term health. A minimum is 1.0, with 1.5 considered a healthy business.
What practices should the architect use to help ensure invoices are received and paid by client?
- Make sure invoice is sent to correct person / office
- Be clear on client’s unique payment proceedures
- Use a more personalized approach for the first few invoices
- Include billing terms renegotiation for long-term projects
- Be aware of common tricks used to delay paying architect invoices
