Construction finance glossary

1

1099 subcontractor also independent contractor, 1099 worker, sub: An independent business you pay for work on your jobs, reported to the IRS on Form 1099-NEC once payments reach $600 in a year, rather than an employee on payroll.

A

Allowance also selection allowance, material allowance: A placeholder amount in a contract for an item the client hasn't chosen yet. If the selection costs more, the overage is billed; if less, the difference is credited.

B

Backcharge also back charge, chargeback, deductive charge: A cost a general contractor deducts from what it owes a sub for work the sub failed to do or damage the sub caused: cleanup, repairs, another trade's rework.
Budget vs. actual also budget variance, cost variance report, estimate vs. actual: The per-cost-code comparison of what a job was expected to cost, what it has cost, and what's committed. The report that shows drift while the job can still be steered.

C

Certificate of insurance also COI, insurance certificate, ACORD 25: A one-page summary from an insurer proving a contractor or sub carries the coverage a contract requires, with limits and dates. Collected before work and before payment.
Change order also CO, variation, extra: A written, signed amendment to a construction contract that adds, removes or alters scope and states the change in price and schedule. The only way a fixed price moves.
Committed cost also commitment, open commitment: A cost you've agreed to pay but haven't been invoiced for: a signed subcontract, a placed order, an accepted quote. It belongs in the job's forecast from that day.
Contingency also contingency reserve, contingency allowance: Money set aside in a budget for costs that are expected but can't be named yet: the wall that isn't in the drawings. Usually 5% to 15% of direct cost on renovation work.
Contract value also contract sum, contract price, original contract: The price the client agreed to pay for the original scope. It never changes retroactively; approved change orders sit on top of it to form the adjusted contract value.
Cost code also cost category, cost division, CSI code: A short label from a fixed list (demolition, framing, electrical, permits, labor) tagged on every job cost, so budgets, actuals and estimates line up on every job.
Cost to complete also estimate to complete, ETC: Your best estimate of what a job still needs to spend to finish: remaining commitments plus labor and material not yet bought. Recorded cost plus this is the forecast.
Cost-plus contract also cost plus, cost-plus-fee, open book: A contract where the client pays the contractor's actual documented costs plus an agreed fee, a percentage of cost or a fixed amount, instead of a single fixed price.

D

Deposit also down payment, initial payment, mobilization payment: The payment a client makes at signing, before work starts, to fund materials and hold the schedule. Some states cap it on residential work; California at 10% or $1,000.
Direct cost also job cost, cost of sales, hard cost: A cost that exists because a specific job exists: its materials, crew labor on site, subs, permits, rentals and deliveries. The costs job costing assigns to a project.
Draw schedule also payment schedule, draws: The agreed list of payments on a contract, each tied to a milestone or date, stating what share of the price is due when. Progress billing's residential form.

E

Estimate at completion also EAC, expected final cost, forecast final cost: The total a job is expected to cost when it's done: what's been recorded so far plus the cost to complete. Compared with the contract, it's the job's expected margin.

F

Final payment also final draw, completion payment, balance due: The last draw on a contract, due when the work is complete and accepted, usually with released retainage. The payment most often delayed, and the one lien rights protect.
Fixed-price contract also lump sum, stipulated sum: A contract for a set scope at a set price. The contractor keeps any savings and absorbs any overrun; changes to the scope are priced separately through change orders.

G

General conditions also general requirements, site overhead, job overhead: The job-specific costs of running a site that belong to no trade: supervision, dumpsters, portable toilets, temporary power, cleanup, permits, site protection.
Gross margin also gross profit margin, gross profit: Revenue minus the direct costs of the job (labor, materials, subs, permits), as a percentage of revenue. The number a bid is measured by, before overhead is paid.
Guaranteed maximum price also GMP, cost-plus with a cap: A cost-plus contract with a ceiling: the client pays documented cost plus fee up to an agreed maximum; the contractor absorbs anything above. Savings are often shared.

I

Indirect cost also indirect job cost, burden, shared cost: A cost that supports the work without belonging to one job: yard rent, trucks, tools, insurance, shared supervision. Recovered through the overhead rate, not a job.

J

Job costing also job cost accounting, project costing: Keeping each job's money separate: what it was sold for, every cost it incurred, what's been collected and the margin left, so you know which jobs made money.

L

Labor burden also burdened labor rate, fully loaded labor cost: Everything a worker costs beyond the wage: payroll taxes, workers' comp, insurance, paid time off and unbillable hours. Wage plus burden is the true hourly cost of labor.
Lien waiver also lien release, waiver of lien: A signed document in which a contractor, sub or supplier gives up the right to file a lien on the property for work or materials covered by a specific payment.

M

Markup also markup percentage, markup on cost: The percentage added on top of a job's direct cost to reach the price. Measured against cost, so a 25% markup is a 20% margin; the two are not interchangeable.
Mechanic's lien also construction lien, contractor's lien: A legal claim against a property by a contractor, sub or supplier who improved it and wasn't paid. It clouds the title until the debt is settled or the lien released.

N

Net margin also net profit margin, net income before tax: What's left of revenue after direct job costs and overhead are both paid, as a percentage of revenue. The business's result, not the job's; industry averages sit near 6%.

O

Overbilling and underbilling also billings in excess of costs, costs in excess of billings: Overbilling is invoicing more than the work completed has earned; underbilling is invoicing less. Both are found by comparing billed to earned on a WIP report.
Overhead also indirect costs, general and administrative, G&A: The costs of running the business no single job causes: rent, trucks, insurance, office, the owner's salary. As a rate, what every bid must recover above direct cost.

P

Pay application also pay app, application for payment, AIA G702/G703, payment application: A formal progress-payment request listing work completed per schedule-of-values line, prior payments, retainage and the amount due. AIA G702 and G703 are the forms.
Progress billing also progress payments, milestone billing, draws: Invoicing a job in stages as work is completed, by milestone or by percentage of each schedule-of-values line, instead of a single invoice at the end.
Punch list also snag list, deficiency list, closeout list: The list of small items still to fix or finish after a job is substantially complete: touch-ups, adjustments, missing hardware. Closing it usually triggers final payment.
Purchase order also PO: A written order to a supplier or sub for specific goods or work at a stated price. Once accepted, it's a committed cost on the job, whether or not an invoice has arrived.

R

Retainage also retention, holdback: The share of each progress payment, usually 5% to 10%, that a client or general contractor holds back until the work is complete and accepted.

S

Schedule of values also SOV: A line-by-line breakdown of a contract price into the parts of the work, each with its own value, used to bill progress as a percentage of each line completed.
Substantial completion also substantially complete, beneficial occupancy: The point at which the work is finished enough for the client to use the space as intended, punch list aside. It starts the clocks on final payment and warranties.

T

Time and materials also T&M, hourly plus materials: Billing by the hour for labor at agreed rates plus materials at cost or cost plus markup, with no fixed total. Used when the scope can't be defined before work starts.

U

Unit price also unit rate, unit cost, per-unit pricing: A price per unit of measured work, such as per square foot of tile, per linear foot of fence or per cubic yard of concrete, billed on the quantity actually installed.

W

Work-in-progress report also WIP schedule, WIP report, work in progress: A schedule of every open job with contract, estimated cost, cost to date, percent complete, earned revenue and billings, revealing over- and underbilling.