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Construction Contract and Its Revenues

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  • Level: Undergraduate/College
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Answer :
Organization Selected : FAJARBARU and GBD

INTRODUCTION

The process of constructing, buildings, monuments, and large infrastructure is known as construction. The concept of construction is totally different from manufacturing such as, it means production of similar items without a designated purchaser. To understand the importance of construction two famous companies of Bursa Malaysia are taken into the context. FAJARBARU and GBD are famous companies of Malaysia that provide their services in different areas of country (Arnold, 2012).

In this project report, a brief introduction followed by the type of activities, financial highlights and address is given. An explanation about the construction contract, its revenues, cost and percentage of completion is discussed. Report also shows disclosure of both companies, comparison and similarities is focused under this. And at last key finding of the project is been focused.

1. Introduction of two companies.

GBD Holding Berhad is located in famous area of Malaysia, near Bandar Puteri Puchong. It is an investment holding company and most of their activities are involved in construction business in country. The company focus on high-rise residential, commercial and mixed development project. On the other side FAJARBARU is an organisation that is impelled to become one of the famous and trusted partner for all construction and property demands holder in Malaysia. The company is located on 61 & 63, Jalan SS 6/12,Ss 6, Petaling Jaya, Selangor, Popular cooperate area of country. Fajarbaru Builder Group Bhd is involved in the different business activities such as investment holding and provision of management services such as property building and development, construction and trading etc. The Group also shows their interest and wants to engage in some other activities such as timber logging, trading and logistics (Banerjee, 2012). In both companies, the property development are one that develop commercial and residential properties, construction division are basically incurred as general builder in the construction industry and logging of timber segment is engaged in the extraction of timber. For financial highlights every company prepare their financial statement such as cash flow, balance sheet, income statement and ratio analysis. Fajarbaru Builder Group Bhd in financial year 2018 earns a total revenue of about 58864, net profit is 2939, Net profit margin of company decrease from 15.66% to 11.6% in year 2018 and Earning per share also shows decrease in rate from 2.76 to 0.56 which means company is not doing as expected to maintain profitability and productivity.

GBD Holding Berhad has a large market capital of about 164 million, their revenue for last financial year is 298934, net profit margin is 10.52% return on investments is 37.03% and earning per share is 5.03cent. The net worth of company is 84944 , dividend are paid at 0.26% to its shareholder, revenue per share is 47.83% and payout are calculated on 0.26% for the accounting year 2017-18. The balance sheet of Fajarbaru Builder Group Bhd shows cash and short term investment 49.88 million, total debts are 95.17M, total Liabilities are 212.43M, total shareholder equity is 287.05M. From the balance sheet of GDB Holding Bhd cash and short term investment is about 83.32 million, Total debt are nil for the year 2018, total liabilities are 95.22 M, shareholder equity is 91.96 M and values of share as per book record is 0.15. profitability ratio such as gross margin is 11.71%, operating margin is 1.011% etc.

2. Explanation of the construction contract.

There are basically six types of construction contract, that is develop by mutual and legal binding agreements among the two parties depended upon construction policies and condition recorded in the papers. The two parties are owner that wants to construct his property and the other is contractors who actually construct these properties. The six types of contract are Lump sum contract, item/unit price contract, scheduled contract, cost plus fixed fee contract, special contract, cost plus percentage contract (Chiang, Nouri and Samanta, 2014). These all are depended upon the working environment of companies and makes them capable to handle any kind of owner. They work in difficulties like foundation condition, construction of expensive structure etc. In both companies these types of contract an important role for better handling of customer and help them to improve their profitability and productivity.

Cost revenues: It is measured at the consideration received and is affected by the number of uncertainties that depends on the result of upcoming events. It is observed that the estimate often needs to be revised as events occur which have to be resolved, so the amount of contract revenue may increase or decrease from depends upon the period to the upcoming time. For instance, the amount of income agreed according to the fixed price contract may increase as a outcome of cost escalation clauses or when a constant price involves per unit of output, contract revenue increase as the total number of unites keeps on increasing. Contract revenue comprise a variation, claim and incentive payments. A variation is said to be an instruction given by the customer for a change in scope of the work performed by under the agreements between the parties (Danthine and Donaldson, 2014). Claims are described to be the amount that a contractor seeks to bather from a customer or the party as reimbursement for cost that was included in the contract price. Similarly contract revenue are said to be an additional amount of money that is payable to the declarer if nominative execution standard are met or exceeded. In both companies, GDB Holding Bhd and Fajarbaru Builder Group Bhd have importance of contract revenue as this amount helps in maintaining profit in company and help them to increase their productivity.

Contract cost: according to construction contract the contract cost comprise that total cost that relate directly to the certain contract, those price that are attributed to the activity which can bed allocated within a contract. It also include other cost as are specifically indictable to the buyer that is covered under the terms of agreements. In companies costs which are related to specific contract includes, labour cost like site supervision, cost of overall material used in modifying property, depreciation of plant and building written in agreements, total cost of moving plant, equipment and material to and from the contract site, hiring plant and instruments, cost involved on design and technical assistance which is part of the contract done with owner, it included claims from the third parties and the estimation cost of rectification and work which further includes expected warranty costs. Contract cost are attributed also to the contract activity in general that can be allocated to the specific agreements that includes, insurance, construction overheads and the cost of design of technical material and instrument which is directly related to certain contract. Similarly some contact cost cannot be attributed to specific agreements or cannot be allocated to a contract that can be leave out such as, general administrative cost that cannot be reimbursement, total selling cost, cost related top research and development for which compensation cannot be provided and the depreciation of the plants and instruments those are bought for completing work but are not used in a particular contract (De Waegenaere, Sansing and Wielhouwer, 2015).

Percentage of completion: when companies recognition of income and expenditure by mention to the stage of the completion of a agreement is often referred to the percentage of completion method. According to this method contract revenue are matched to the contract cost by the contractor that was incurred by him in reaching the completion stage of a project. It result in the reporting of revenue, expenditure and total profit that could be attributed depended upon the total work completed. The main importance of this method is to give necessary information on the extent of agreement and performance during a period. This method of percentage of completion the revenues are recognised as total income in the profit and loss statement during an accounting year according to the work completed. Where as contract cost are recorded as an expenses on income statements for financial year that is related to which they relates is performed.

3. Disclosure and presentation of both companies.

According to compliance of Malaysian accounting standard board 111 a contractor has reached the end of its first year of operation in which all cost are incurred have been paid in the cash and all their increments billings and advances have been collected in cash payments. It it was concluded by the companies that material uncertainly exists, then manager are required to give attention in their reports to the related disclosure in the financial statements of the both companies. It is observed that if such disclosure are inadequate that cannot be modifies then conclusion must relay on the audit evidence obtained up to the date to modify, opinion o9f auditor of companies that will be benefited for contractor of companies develop a cease to continue a going concern (Macve, 2015). Contractor of companies GDB Holding Bhd and Fajarbaru Builder Group Bhd included contract expenses that are included by them on certain specific contract, such as cost of material that have been purchased by them, for the contract which have been not used in the agreement performance at the time of reporting. For example in GDB Holding Bhd the contact A, B, C, D, E are some contract, but contract cost on B, C and E includes the cost that was spend by contractor to carry operation but not utilize by them.

In Fajarbaru Builder Group Bhd, contractor have taken five project in their disclosure that were taken by them during an agreement with the owner. But at the same time some it was observed that some of the construction contract C, E the cost on contract includes the cost of material that have been bought for the contract that have been used in agreements as at the time of formation of reports.

4 Comparison of disclosure of both companies.

In case of comparison between the disclosure of two companies that different disclosure requirement have to be followed by the contractor of two companies. This is because the information for the notes section in their financial statements are use to be collected individually once the balance sheet, income statements and other financial documents are prepared. The data collected have to be summarised in a different list instead of being incorporated in the single detailed programs (Stice, and Stice, 2013). The following are the criteria for comparisons between the two companies that are kept in notes by the contractor:

  • The accounting policies and the contract cost formula that have to be used in inventory valuation.
  • Carrying total amount and the actual down break that may impact the values of contract revenues by appropriate classification such as production supplies, work in progress etc.
  • The amount of actual contract cost and contract revenue that is recognised during an accounting year (Sargent, 2013).
  • The total amount that is to be estimated by implementing the percentage of completion formula, so that circumstances or event that led to the reversal of revenue and cost within the construction cost.

On the basis of analysis about two companies the comparison can be done by making sure that standard of construction contract are followed and compliance of MFRS 111 are implemented on their report. The live status of both companies shoes that some of the project are just brought by constructor that are not utilised in the agreements. When Fajarbaru Builder Group Bhd, focused on 5 project in an agreement with party but after the implemented of percentage of completion formula the contractor figure out the contract cost incurred on these C, E are not utilize by completing a project. Similarly from the analysis of five project of GBD Holding Behrad, the contract cost involved of these agreement project the ascertain that cost incurred on B, C, D are being paid extra that are not part of project any more and cost have to be re coved within the two utilize project.

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CONCLUSION

From the above report it has been concluded that, construction contract are said to be a mutually agreed documents between the owner of property and the contractor who is responsible to modifies that property. Different types of construction contract such as lump sum, cost plus, time and material contract etc. support contractor and owner to be bounded within a relationship. The report shows the disclosure of both companies under the MFRS 111 that makes a ground for comparison so that proper productivity and profitability.

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