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Accounts Receivable (A/R)
What is Accounts Receivable (A/R)?
Accounts Receivable (A/R) in the construction industry refers to the amount of money owed to a construction company for goods and services it has provided but has not yet been paid for. This is typically recorded as an asset on the company's balance sheet as it represents a legal obligation for the customer to remit payment to the company. The A/R system helps track these outstanding payments within a set time period, allowing construction companies to manage their cash flow effectively. It's essential for construction firms to monitor their A/R closely, as late or uncollected payments can significantly impact their financial health and ability to fund future projects.
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Other construction terms
What is a Unit Price Contract?
A unit price contract is a widely used pricing model in the construction industry where general contractors (GCs) provide a fixed price for each unit of work and material (based on the anticipated quantities specified by the client). The final contract amount is calculated by multiplying the pre-agree unit prices by the actual quantities used or work performed.
This approach allows for flexibility as the total costs adjust to reflect actual usage. Therefore, unit price contracts are ideal for projects with uncertain material and work quantities, helping avoid cost overruns due to miscalculations.
For subcontractors, there are specific considerations when working with unit price contracts. It’s crucial to ensure precise unit price calculations to maintain profitability and implement sound systems for tracking and reporting actual quantities. Clear communication with the GC about quantity changes is also important, and subcontractors should be prepared to justify any discrepancies that may occur.
Siteline—an intuitive A/R management system—simplifies unit price billing for subcontractors, allowing them to:
- Easily input and update unit prices;
- Automatically calculate billing amounts based on reported quantities; and
- AGÕæÈËÓÎÏ· accurate, detailed pay applications that show up-to-date unit prices and quantities.
Ready to optimize your unit price billing process? Contact Siteline today to learn how our solution enhances A/R workflows to accelerate payments.
What is a Contingency?
In the realm of construction, a contingency refers to a certain amount of money set aside to cover unexpected costs that might arise during the project’s execution. This allocation, usually accounting for an estimated 5-10% of the total project cost, acts as a financial cushion, providing security against unforeseen circumstances such as construction delays, changes in building codes, design modifications, or a surge in material prices. Additionally, it could also account for potential legal issues such as disputes over contracts. Overall, a contingency is an essential risk mitigation element for construction projects to ensure a smooth transition even in the face of unpredicted challenges.
What is a Current Ratio?
A Current Ratio is a financial metric primarily used in the construction industry to gauge a company's short-term liquidity and ability to pay off its immediate obligations. It is calculated by dividing a company's current assets by its current liabilities. In construction, current assets include cash, accounts receivables, and inventory (like raw materials and work in progress), while current liabilities encompass accounts payable, income taxes, wages, and current portion of long-term debt. A high ratio indicates a company's robust financial health, implying it has adequate resources to cover its short-term debts. However, it varies depending on the specific business environment, so it is essential to compare this ratio with firms in the same construction sector for accurate benchmarking.
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