Surety Bond Quarterly - Winter 2017 - 29

costs of leasing or owning equipment
include support costs to keep the
equipment in good operating status,
in additional to properly managing
risk with insurance.
Equipment and vehicle costs that
should be maintained in an overhead
cost pool include the following:
* Depreciation (make sure that
depreciable lives and methods
are appropriate for each piece
of equipment or vehicle, and
consistently applied)
* Repairs and maintenance,
including parts
* Personal property and other taxes
* Insurance (inland marine,
vehicle insurance)
* Shop labor (and its own
associated labor burden)
* Interest (sometimes all interest
is treated as general and
administrative expense, not
indirect job cost)
* Fuel and oil (sometimes fuel is
recorded as a direct cost to a
specific contract)
The method used to allocate equipment and vehicle costs to a specific job
once again depends on the sophistication of the contractor, its accounting
software capability, and the capability
of its accounting personnel.
Smaller contractors usually allocate
their pool of equipment and vehicle
costs as a percentage related to the
direct labor dollar associated with a
specific job. This usually has to be
projected for a period of time so that
the contractor has sufficient information to use in its bidding and estimating process (same as the labor
burden pool discussed previously).
Unless the contractor has few types
of equipment, allocating an entire
pool of equipment or vehicle costs
in this manner can lead to substantial
distortion of job costs. For example,
perhaps a specific job used more
expensive equipment than another
job. Each job would bear the same
weight of equipment cost. The job that
used the more expensive equipment
would be advantaged over a job that
used less expensive equipment.
Larger contractors, supported by
their accounting software, can treat

each individual piece of equipment
(or category of equipment, such as
excavators) as its own cost center,
much like a job. They usually allocate
equipment use to a specific job by
recording specific hours of use by
field labor to that job, using hourly
rental rates. Specific costs related to
that piece of equipment, or category
of equipment, is recorded to the individual cost center (for example, parts,
repairs, insurance, depreciation).
Hourly rental rates are developed
using a variety of sources. Many use
local external rental rates, discounted
for external profit. Some develop
internal equipment rates using a consistent rate development approach
(for example, projecting total cost for
a piece of equipment over a period
of time, divided by projected use) to
get an hourly cost rate. Others use an
external source of information, such as
Equipment Watch (equipmentwatch.
com), which produces the Rental Rate
Blue Book (now known as the Cost
Recovery Book). This is a service that
can be subscribed to online, giving
access to most up-to-date costs. In
addition, certain government agencies
have approved the use of this resource
on federally funded projects, including
force account work.
What to do with ending variances
between equipment cost rates applied
and actual equipment costs and idle
equipment? Because all methods of
equipment cost allocation use estimated rates or percentages, it is
usual to have a situation at year-end
of under- or over-allocated equipment
costs. This variance should be applied
proportionately to jobs. Some contractors apply the variance entirely to completed contracts; however, we believe
that distorts contracts in process. The
costs of equipment that has remained
idle for a significant period of time,
including depreciation and insurance,
must nevertheless be included in the
overall allocation of indirect costs to
jobs. If a piece of equipment is idle
for an entire year, there is support
in accounting principles to suggest
that its period of depreciation can be
lengthened by one year (for example,
if being depreciated over 10 years,

the life can be increased to 11 years).
Depreciation cannot, however, just be
omitted for one year.
Other Indirect Overhead
Other miscellaneous indirect job costs
should also be accumulated and allocated to jobs on a periodic basis. These
costs include, but are not limited to,
the following:
* Small tools and general
job supplies
* Safety programs and supplies
* Drug testing programs
* Shop and yard costs (such as
shop/yard rental and utilities)
* Items provided to support and
field personnel (such as mobile
telephones or other devices
or tools)
* Quality control programs
* General liability insurance (if not
based on payroll exposure)
* Other insurances (such as
umbrella, builders' risk, etc.)
* Ways to allocate indirect costs
GAAP allows for several approaches
to allocate overhead costs to jobs:
* Direct labor costs
* Direct labor hours
* Combination of direct labor and
material costs
There are no other methods allowed
under GAAP. Whatever system a contractor uses, it should be systematic,
logical, and applied consistently from
year to year.
Ensuring that careful attention is paid
to the components of indirect costs and
an appropriate, consistently used base
for allocation is key to improving a contractor's opportunity to both control
costs and improve its bottom line. ●
R.A. Bobbi Hayes, CPA, CFE, CCIFP,
CVA, CEPA is a partner at Carr, Riggs &
Ingram, LLC, in Albuquerque, NM, serving as partner-in-charge of consulting
services and co-leader of its regional
construction services niche. She works
with a wide variety of contractors, subcontractors, and professional service
firms in the heavy, highway, building,
and specialty trade construction markets. She serves on the NASBP CPA
Advisory Council. She can be reached
at bhayes@rpcllp.com or 505.883.2727.

NATIONAL ASSOCIATION OF SURETY BOND PRODUCERS | WWW.NASBP.ORG

29


http://WWW.NASBP.ORG

Table of Contents for the Digital Edition of Surety Bond Quarterly - Winter 2017

NASBP Upcoming Meetings & Events
2017–2018 Executive Committee
From the CEO: Looking Backward to Reach Forward
Relationships for the Long Run
Subcontractor Default Insurance: Relevant Considerations for the Surety Claims Professional
Bottom Line Protection with Job Cost Accumulation & Allocation
Inside the AIA’s New Insurance and Bonding Contract Exhibit
The Calm After the Storm: Managing Disaster Response Contracts
Practical Tools to Help Jump-Start Your Company’s Cyber Plan
Index to Advertisers
Surety Bond Quarterly - Winter 2017 - Intro
Surety Bond Quarterly - Winter 2017 - cover1
Surety Bond Quarterly - Winter 2017 - cover2
Surety Bond Quarterly - Winter 2017 - 3
Surety Bond Quarterly - Winter 2017 - 4
Surety Bond Quarterly - Winter 2017 - 5
Surety Bond Quarterly - Winter 2017 - 6
Surety Bond Quarterly - Winter 2017 - 2017–2018 Executive Committee
Surety Bond Quarterly - Winter 2017 - 8
Surety Bond Quarterly - Winter 2017 - From the CEO: Looking Backward to Reach Forward
Surety Bond Quarterly - Winter 2017 - 10
Surety Bond Quarterly - Winter 2017 - Relationships for the Long Run
Surety Bond Quarterly - Winter 2017 - 12
Surety Bond Quarterly - Winter 2017 - 13
Surety Bond Quarterly - Winter 2017 - Subcontractor Default Insurance: Relevant Considerations for the Surety Claims Professional
Surety Bond Quarterly - Winter 2017 - 15
Surety Bond Quarterly - Winter 2017 - 16
Surety Bond Quarterly - Winter 2017 - 17
Surety Bond Quarterly - Winter 2017 - 18
Surety Bond Quarterly - Winter 2017 - 19
Surety Bond Quarterly - Winter 2017 - 20
Surety Bond Quarterly - Winter 2017 - 21
Surety Bond Quarterly - Winter 2017 - 22
Surety Bond Quarterly - Winter 2017 - 23
Surety Bond Quarterly - Winter 2017 - 24
Surety Bond Quarterly - Winter 2017 - 25
Surety Bond Quarterly - Winter 2017 - Bottom Line Protection with Job Cost Accumulation & Allocation
Surety Bond Quarterly - Winter 2017 - 27
Surety Bond Quarterly - Winter 2017 - 28
Surety Bond Quarterly - Winter 2017 - 29
Surety Bond Quarterly - Winter 2017 - Inside the AIA’s New Insurance and Bonding Contract Exhibit
Surety Bond Quarterly - Winter 2017 - 31
Surety Bond Quarterly - Winter 2017 - 32
Surety Bond Quarterly - Winter 2017 - The Calm After the Storm: Managing Disaster Response Contracts
Surety Bond Quarterly - Winter 2017 - 34
Surety Bond Quarterly - Winter 2017 - Practical Tools to Help Jump-Start Your Company’s Cyber Plan
Surety Bond Quarterly - Winter 2017 - 36
Surety Bond Quarterly - Winter 2017 - 37
Surety Bond Quarterly - Winter 2017 - Index to Advertisers
Surety Bond Quarterly - Winter 2017 - cover3
Surety Bond Quarterly - Winter 2017 - cover4
https://www.nxtbook.com/naylor/SBPQ/SBPQ0118
https://www.nxtbook.com/naylor/SBPQ/SBPQ0417
https://www.nxtbook.com/naylor/SBPQ/SBPQ0317
https://www.nxtbook.com/naylor/SBPQ/SBPQ0217
https://www.nxtbook.com/naylor/SBPQ/SBPQ0117
https://www.nxtbook.com/naylor/SBPQ/SBPQ0416
https://www.nxtbook.com/naylor/SBPQ/SBPQ0316
https://www.nxtbook.com/naylor/SBPQ/SBPQ0216
https://www.nxtbook.com/naylor/SBPQ/SBPQ0116
https://www.nxtbook.com/naylor/SBPQ/SBPQ0415
https://www.nxtbook.com/naylor/SBPQ/SBPQ0315
https://www.nxtbook.com/naylor/SBPQ/SBPQ0215
https://www.nxtbook.com/naylor/SBPQ/SBPQ0115
https://www.nxtbook.com/naylor/SBPQ/SBPQ0414
https://www.nxtbook.com/naylor/SBPQ/SBPQ0314
https://www.nxtbook.com/naylor/SBPQ/SBPQ0214
https://www.nxtbookmedia.com