January 2019 - Volume 7 Issue I

WEM^®, the ONLY Recognized method for Implementing the NEW FASB Revenue Recognition Practices 

For the first time in decades, companies across the globe are dealing with a new way of recognizing revenue. The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have issued standard ASC 606 in an attempt to develop better control over revenue recognition, billing practices and income tax obligations. ASC 606 is expected to provide a universal accounting language for revenue recognition, but it relies heavily on each company’s judgement to come up with their own figures, which can differ from company to company. Despite many misnomers in the market, this new change can help contractors recognize activities, which historically they did not get paid for and had to be hidden as part of their cost codes.

Figure 1

The process of recognizing revenue has changed considerably; don’t be fooled into thinking that ASC 606 will not affect you.  According to the core principle of ASC 606, project revenue should be recognized upon transfer of promised goods or services to customers. To comply with the core principle, construction contractors should deploy a five-step model (Figure 1) to recognize their project revenues. Rather than relying on the traditional cost-based method, the new model requires measuring project progress toward “fulfilled performance obligations”. While the new standard does not use the term “percentage of completion,” revenue will continue to be recognized over time for long-term contracts using a single method to measure progress against each performance obligation within the contract. Given most construction contracts by their nature are long-term; their “fulfilled performance obligations” can only be reflected by the percent completion of the actual work. Determination of whether a good or service is distinct and then applying percent complete will require judgment and, most likely, be the most challenging steps in this five-step model.

Traditional calculations of percentage of completion rely on cost-to-cost or units of worked performed, which do not provide reasonably accurate and quantifiable estimate of the progress towards contract completion. This issue has been addressed in The American Society for Testing and Materials (ASTM Standard E2691) and Job Productivity Management (JPM) Standard E2691, developed by MCA Inc., as the only official reference for measuring and tracking percent completion in construction. The standard has been promoted in an applied way with Job Productivity Assurance and Control (JPAC^®) software, one of two commercial applications enabling implementation of the JPM Standard. This in combination with the other application, Short Interval Scheduling (SIS^®), provides a strong proof of “fulfilled project progress” for both project managers and accounting professionals to determine the most accurate amounts to bill on a regular basis.

For more information on JPM Software Packages (SIS^® & JPAC^®), Agile classes and/or classes on FASB call (810) 232-9797 or click here. 

More information on FASB can be found in an article written for EC&M Magazine; click here and in Book 2 of the Industrialization of Construction® Series (Section 2.5.1, page 39); click here.

What to focus on first and how evaluate it to achieve the best outcome for your company:

Do you sometimes feel like there is just so much that needs to get ‘fixed’ or needs your attention that you don’t even know where to begin? You are not alone. Every company in any industry has processes and procedures, which carry a high-risk factor and can add to your stress level if they are not followed or executed correctly. In fact, in 1949 the Military developed a procedure that helps to sort and prioritize all the different items that you have on your list. This procedure will help to identify what you should focus on first to eliminate your highest risk.

This tool is called Failure Mode and Effect Analysis (FMEA).  It is a structured approach on how to identify the risk in terms of how different causes of failure impact your  business and then helps to evaluate which of the items you should focus on first. Let’s say your company’s process on getting the billing out in time is not as good as you want it to be. And therefore your company suffers on under billing and keeps having issues with a stable cash flow. If you want to start working on this process you have a lot of different options on what to focus on first: PM’s understanding of the financial impact, PM’s accuracy of %-complete reporting on their job, PM’s Prioritization on the billing duties, accounting software’s capabilities of reporting, etc. If you try to work on all of these items at once it will feel like you’re not getting anywhere and you are stuck in quicksand. This is true since you are trying to focus on too many things at once while everyone is still trying to accomplish their primary duty of managing projects.

Figure 2

FMEA helps you to break the different elements down and to weigh them on how much impact they will have on the result being studied, underbilling in this example. Therefore, a couple items need to be identified: What is the potential failure, the cause, and what the potential effect will be, and if there are any process controls in place. After each of the items has been identified the expert group, which has been assembled to work on this project ranks how serious this effect can be, how often it potentially will happen, as well as if the controls that are currently in place will properly detect the issue. In Figure 2 you can find an example for the discussed billing issue. The last step includes multiplying the weighted numbers. Multiplying the values in columns’ (Severity), the value in column ‘O’ (Frequency) and column ‘D’ (Detectability) will result in the Risk Priority number (RPN) shown in the adjacent column. The RPN will identify the process steps that we need to focus on first. In our billing example, the accurate %-complete reporting and the PM financial understanding are the first two elements we need to focus on (RPN = 720 and 900).

If you are interested on how the FMEA tool can help you and your company to focus on the most critical items first please call (810) 232-9797

2019 Spring Symposium

MCA Inc. Presents

Agile Construction^®: A Path to Industrialization

Symposium on the Tools & Processes Needed for Success

8:00am – 3:00pm
Friday, May 17, 2019

The Crowne Plaza,
Northbrook, Illinois

The market is hot, the workforce shortage is real, and the industry is transforming. Be part of the Revolution and hear how it can be done from experts and practitioners of Agile Construction^®, in both union and non-union environments.

Network with other practitioners who want to stay ahead of the curve, improve productivity, safety, prefabrication, reduce risk, and stay competitive. Whether you’re a prefab leader or just getting started, join us May 17^th to innovate the way your team delivers maximum value to your clients.

This spring's Symposium will focus on...

1. Prefabrication in an Industrialized environment
2. Vendor Relationships and Integrated Logistics
3. Managing Work and Labor through Work Breakdown Structure (WBS)
4. Productivity Measurement

We look forward to seeing you!

For more information click here.
To register click here.