Next to Princes Highway East in Victoria, Australia there is a small construction project going on to construct a seven storey building for the accommodation purposes. The building will have all the modern facilities including gymnasium, sports area, swimming pool, garden, car parking facility, recreational area and other necessary facilities. Each floor shall have five separate flats. In order to ensure optimum utilization of financial resources and to complete the construction project at minimum cost it is important to keep financial records of the project properly.
The Ministerial Directions for Public Construction Procurement in Victoria is the highest authority when it comes to providing guidance and accountability management framework for construction works in this part of Australia. In addition to the requirements of Ministerial of Directions for Public Construction Procurement in Victoria the construction projects must also comply with the requirements of purchasing and procurements for construction purposes as enumerated in the supply policies of Victorian Government Purchasing Board (Marsh, 2017).
Audit act 1994: As per the Audit act 1994 all the documents in relation to the construction project must be maintained properly and in original form in which these were originated to support the expenditures incurred in relation to construction of projects (Sandanayake et. al. 2017).
Financial Management Act 1994: Financial Management Act 1994 explains that the finances in construction projects must be managed in a manner associated with prudence.
Project Development and Construction Management Act 1994 (PDCMA): The PDCMA contains all provisions to be followed in managing and developing a public construction project. The act also contains specific provisions to deal with corrupt practices in public construction (Udawatta et. al. 2015).
Public Administration Act 2004: This act contains specific provisions to guide employment principle and values in public sector in relation to construction and development work in Victoria.
In this document the discussion for the specific construction project in Vitoria shall be limited to the financial information, financial records, accounting procedures and record keeping requirements. As already mentioned that the construction projects in Victoria, Australia are subjected to the provisions of Financial Management Act 1994, Audit act 1994 and Public Administration Act 1994 (Cheng, 2014).
The construction of seven storey building right next to the Princes Highway East in Victoria is expected to be completed within a period 21 months with an estimated budget of $95 million. The project must comply with the requirements of different legislations as outlined in the beginning of the document. The project management organization must keep and maintain all necessary financial information in relation to the construction project to comply with the provisions of Financial Management Act 1994 and Audit Act 1994 (Osei-Kyei and Chan, 2015).
Financial information kept and maintained by the construction management organization are subjected to compulsory audit as per the Audit act 1994. The auditors while conducting audit of such construction projects will conduct an independent verification of the financial reports and verify the supporting documents and other reports to express an independent opinion on the financial information and the supporting documents for the construction project. The following financial information shall be maintained by the construction project to comply with the requirements of Financial Management Act 1994 and Audit Act 1994 (Mok, Shen and Yang, 2015).
Statement showing the expenditures incurred on the construction project:
The statement showing the amount of expenditures incurred on the construction project from beginning till the completion with proper classifications shall be maintained (Komninos and Cameron, 2017).
Financial information to show the expenditures incurred on different heads:
The financial information containing information about different expenditures incurred for the construction of the project shall be maintained.
Budgets:
The forecasting statements indicating the expected expenditures and revenue from the construction project shall be kept.
In this case it is estimated that the following expenditures shall be incurred on the construction and development of the seven storey building next to the Princes Highway in Victoria (Jones, 2017).
|
Particulars |
Amount ($) |
Amount ($) |
|
Preliminary expenditure on sight verification and investigation |
65,000.00 |
|
|
Soli testing expenditure |
25,000.00 |
|
|
Planning and designing costs |
120,000.00 |
|
|
Expected cost of ground floor |
210,000.00 |
|
|
Direct materials |
7,500,000.00 |
|
|
Direct labours |
3,750,000.00 |
|
|
Architecture costs |
1,875,000.00 |
|
|
Furnishing and completion costs |
1,875,000.00 |
|
|
15,000,000.00 |
||
|
Expected cost of first floor |
||
|
Direct materials |
4,000,000.00 |
|
|
Direct labours |
2,000,000.00 |
|
|
Architecture costs |
1,000,000.00 |
|
|
Furnishing and completion costs |
1,000,000.00 |
|
|
8,000,000.00 |
||
|
Expected cost of second floor |
||
|
Direct materials |
5,000,000.00 |
|
|
Direct labours |
2,500,000.00 |
|
|
Architecture costs |
1,250,000.00 |
|
|
Furnishing and completion costs |
1,250,000.00 |
|
|
10,000,000.00 |
||
|
Expected cost of third floor |
||
|
Direct materials |
5,000,000.00 |
|
|
Direct labours |
2,500,000.00 |
|
|
Architecture costs |
1,250,000.00 |
|
|
Furnishing and completion costs |
1,250,000.00 |
|
|
10,000,000.00 |
||
|
Expected cost of fourth floor |
||
|
Direct materials |
6,000,000.00 |
|
|
Direct labours |
3,000,000.00 |
|
|
Architecture costs |
1,500,000.00 |
|
|
Furnishing and completion costs |
1,500,000.00 |
|
|
12,000,000.00 |
||
|
Expected cost of fifth floor |
||
|
Direct materials |
5,500,000.00 |
|
|
Direct labours |
2,750,000.00 |
|
|
Architecture costs |
1,375,000.00 |
|
|
Furnishing and completion costs |
1,375,000.00 |
|
|
11,000,000.00 |
||
|
Expected cost of sixth floor |
||
|
Direct materials |
6,500,000.00 |
|
|
Direct labours |
3,250,000.00 |
|
|
Architecture costs |
1,625,000.00 |
|
|
Furnishing and completion costs |
1,625,000.00 |
|
|
13,000,000.00 |
||
|
Expected cost of seventh floor |
||
|
Direct materials |
7,500,000.00 |
|
|
Direct labours |
3,750,000.00 |
|
|
Architecture costs |
1,875,000.00 |
|
|
Furnishing and completion costs |
1,875,000.00 |
|
|
15,000,000.00 |
||
|
Total expected cost of completion |
94,210,000.00 |
As already provided that the expected cost of construction is $95 million seems sufficient to complete the construction project. However, the management of the project shall determine whether the project would be completed within the above estimation (Ferris et. al. 2017).
As per the Financial Management Act 1994 and Public Administration Act 1994 the following financial records must be kept in relation to the construction of seven storey building next to Princes Highway in Victoria.
AASB 111 has been issued by the Australian Accounting Standards Board (AASB) to be followed for construction contracts. The standard has specified the accounting procedures to be followed in maintaining the accounts in relation to construction contracts. In this case also the guidelines enumerated in AASB 111 must be followed to maintain proper accounting records for the construction of seven storey building in Victoria.
Generally, the construction contracts are different compare to normal business activities hence, AASB 111 does not allow recognition of revenue to the construction contracts. Since most of the constructions stretched for a period over 12 months hence, at the close of the year percentage of completion method is used to recognize revenue in the construction account. The construction in this case is expected to be completed with 21 months thus, after the completion of 12 months the percentage of completion method shall be used to provide for recognition in the construction account. In case of expenditures, all items of expenditures shall be recorded immediately subsequent to incurring such expenditures. In addition the expected loss from construction shall be recorded immediately in the construction account whereas no amount of expected profit to be recognized in the books of accounts until unless the same has been earned and realized (Komninos and Cameron 2017).
As per the Audit Act 1994 and Public Administration Act 2004 all the financial transactions must be recorded properly as per the relevant accounting standards. The books of accounts for construction contracts must reflect the actual amount of expenditures and revenue of construction. Compulsory audits are conducted on the books of accounts of public construction projects as per the Audit Act 1994. The auditors verifies the books of accounts and supporting documents with an independent mind to express his opinion on the books of account and supporting documents of construction projects. It is important to maintain all the records including supporting documents and vouchers to support the amount of expenditures incurred and revenue generated from construction projects (Udawatta et. al. 2015).
Conclusion:
In this case the project is still in the process thus, all the expenditures incurred must be properly recorded and supporting documents in relation to such expenditures must be maintained to ensure that the auditors can verify the documents at the time of auditing of construction projects. Public Administration Act 2004 requires the construction projects to be properly managed and developed to ensure there is no place for corruption in such construction projects.
References:
Cheng, Y.M., 2014. An exploration into cost-influencing factors on construction projects. International Journal of Project Management, 32(5), pp.850-860.
Ferris, S., Thornthwaite, L., Kyng, T. and Markey, R., 2017. Portable long service leave in the building and construction industry. Australian Journal of Actuarial Practice, 5, p.67.
Jones, D., 2017. Tax and accounting income-Worlds apart?. Taxation in Australia, 52(1), p.14. Available at: https://search.informit.com.au/documentSummary;dn=985999383830105;res=IELBUS. [Accessed on 31 October 2018]
Komninos, J. and Cameron, R.B., 2017. IMPACTS OF REVENUE RECOGNITION CHANGES IN THE CONSTRUCTION INDUSTRY. Available at: https://search.informit.com.au/documentSummary;dn=252313194223017;res=IELENG [Accessed on 31 October 2018]
Lowe, P. and Campbell, F., 2017. Financial Statements.
Marsh, P., 2017. Contracting for engineering and construction projects. Routledge.
Mok, K.Y., Shen, G.Q. and Yang, J., 2015. Stakeholder management studies in mega construction projects: A review and future directions. International Journal of Project Management, 33(2), pp.446-457.
Osei-Kyei, R. and Chan, A.P., 2015. Review of studies on the Critical Success Factors for Public–Private Partnership (PPP) projects from 1990 to 2013. International Journal of Project Management, 33(6), pp.1335-1346.
Sandanayake, M., Zhang, G., Ali, K. and Setunge, S., 2017. An innovative methodology to achieve sustainability of construction projects in Australia-A conceptual study. In Revolutionizing the Architecture, Engineering and Construction Industry through Leadership, Collaboration and Technology (pp. 591-598). East Carolina University.
Udawatta, N., Zuo, J., Chiveralls, K. and Zillante, G., 2015. Improving waste management in construction projects: An Australian study. REsources, conservation and Recycling, 101, pp.73-83.
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