Construction Contract and Its Revenues

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

1. Introduction of Two Companies.

GBD Holding Berhad is located in a famous area of Malaysia, near Bandar Puteri Puchong. It is an investment holding company, and most of its activities are involved in construction business in the country. The company focuses on high-rise residential, commercial, and mixed-development projects. On the other side, FAJARBARU is an organisation that is impelled to become one of the most famous and trusted partners for all construction and property demand holders in Malaysia. The company is located on 61 & 63, Jalan SS 6/12, Ss 6, Petaling Jaya, Selangor, Popular Cooperation Area of the Country. Fajarbaru Builder Group Bhd is involved in 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 is one that develops commercial and residential properties; the construction division is basically incurred as a general builder in the construction industry, and the logging of timber segment is engaged in the extraction of timber. For financial highlights, every company prepare their financial statements, such as cash flow, balance sheet, income statement and ratio analysis. Fajarbaru Builder Group Bhd in the financial year 2018 earned a total revenue of about 58864, a net profit is 2939. The net profit margin of the company decreased from 15.66% to 11.6% in 2018, and earnings per share also showed a decrease in rate from 2.76 to 0.56, which means the 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 the last financial year is 298934; their net profit margin is 10.52%; their return on investments is 37.03%; and earnings per share is 5.03 per cent. The net worth of the company is 84944, dividends are paid at 0.26% to its shareholders, revenue per share is 47.83%, and payout is calculated at 0.26% for the accounting year 2017-18. The balance sheet of Fajarbaru Builder Group Bhd shows cash and short-term investment of 49.88 million, total debts of 95.17 million, total liabilities of 212.43 million, and total shareholder equity of 287.05 million. From the balance sheet of GDB Holding Bhd, cash and short-term investments are about 83.32 million, total debt is nil for the year 2018, total liabilities are 95.22 million, shareholder equity is 91.96 million, and the value of shares 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 contracts that are developed by mutual and legally binding agreements among the two parties depending on the construction policies and conditions recorded in the papers. The two parties are an owner who wants to construct his property and the other contractors who actually construct these properties. The six types of contracts are lump sum contracts, item/unit price contracts, scheduled contracts, cost plus fixed fee contracts, special contracts, and cost plus percentage contracts (Chiang, Nouri, and Samanta, 2014). These all depend upon the working environment of companies and make them capable of handling any kind of owner. They work in difficulties like foundation conditions, construction of expensive structures, etc. In both companies, these types of contracts play an important role in better handling customers and helping 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 depend 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 depending upon the period to the upcoming time. For instance, the amount of income agreed according to the fixed price contract may increase as an outcome of cost escalation clauses or when a constant price involves per unit of output, contract revenue increases as the total number of units keeps on increasing. Contract revenue comprises variation, claim and incentive payments. A variation is said to be an instruction given by the customer for a change in the scope of the work performed under the agreements between the parties (Danthine and Donaldson, 2014). Claims are described as the amount that a contractor seeks to recover from a customer or the party as reimbursement for a cost that was included in the contract price. Similarly, contract revenue is said to be an additional amount of money that is payable to the declarer if nominative execution standards are met or exceeded. In both companies, GDB Holding Bhd and Fajarbaru Builder Group Bhd have the importance of contract revenue, as this amount helps in maintaining profit in the company and helps them to increase their productivity.

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

Percentage of completion: when companies recognise income and expenditure by mentioning the stage of the completion of an agreement, it is often referred to as the percentage of completion method. According to this method, contract revenue is matched to the contract cost by the contractor that was incurred by him in reaching the completion stage of a project. It results in the reporting of revenue, expenditure, and total profit that could be attributed depending 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. In 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 contract costs are recorded as expenses on income statements for the financial year that are related to which they relate is performed.

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3. Disclosure and Presentation of Both Companies.

According to compliance with Malaysian Accounting Standard Board 111, a contractor has reached the end of its first year of operation, in which all costs incurred have been paid in cash and all their increment billings and advances have been collected in cash payments. If it was concluded by the companies that material uncertainly exists, then the manager is required to give attention in their reports to the related disclosure in the financial statements of both companies. It is observed that if such disclosures are inadequate and cannot be modified, then the conclusion must rely on the audit evidence obtained up to the date to modify and the opinion of the auditor of companies that will benefit contractors of companies who develop a cease-to-continue a going concern (Macve, 2015). Contractors of companies GDB Holding Bhd and Fajarbaru Builder Group Bhd included contract expenses that are included by them on certain specific contracts, such as the cost of materials that have been purchased by them for the contract that have not been used in the agreement performance at the time of reporting. For example, in GDB Holding Bhd contracts A, B, C, D, and E are some contracts, but contract costs on B, C, and E include the cost that was spent by the contractor to carry out the operation but not utilised by them.

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

4 Comparison of Disclosure of Both Companies.

In the case of comparison between the disclosure of two companies, different disclosure requirements have to be followed by the contractor of two companies. This is because the information for the notes section in their financial statements is used 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 have to be used in inventory valuation.
• Carrying the total amount and the actual breakdown 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 events that led to the reversal of revenue and cost within the construction cost.

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

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CONCLUSION

From the above report, it has been concluded that construction contracts are said to be mutually agreed documents between the owner of the property and the contractor who is responsible for modifying that property. Different types of construction contracts, such as lump sum, cost plus, time and material contracts, etc. support contractor and owner to be bound 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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