Engineering is a science and contractors tend to think like scientists. Tangible, measurable metrics speak to us contractors. Opinions, feelings, and guesses get less attention. Some construction professionals think that construction industry academics like myself don't roll up their sleeves, put on a hard hat, and get their hands dirty wading into a construction problem. Some also think CFOs simply keep after-the-fact records that may or may not accurately define what occurs in the field. It is critical that we all understand accounting as a science and recognize the pivotal role professional CFOs should be playing in the management of your companies.
What CFOs Do
Throughout my career as a contractor, consultant, and research professor, I have avoided "nerdy" talk because it turns some people off. But today I hope you will indulge me if I get a little nerdy trying to explain the background, power, and critical need for the science of accounting in the management of a construction enterprise.
Engineering: A compilation of dictionary definitions describes engineering as: "The branch of science and technology concerned with the design, building, and use of engines, machines, and structures."
Accounting: According to the American Institute of Certified Public Accountants, "accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions, and events which are, in part at least, of financial character, and interpreting the results thereof."
If I may, I would like to explore this definition a little further.
I don’t see accounting as an art. Like engineering, it is a science that has definite rules that must be followed in order to produce predictable results. If modern accountants start to get "artsy" we will have a problem. (We'll discuss the impact of this on construction in future messages). When accountants adhere strictly to the rules of double-entry bookkeeping originally established in 8th century Persia, they produce predictable results that management can rely on to guide their company into the future. For our purposes, perhaps the following simplified definition will clarify what I am trying to explain:
I see Construction Accounting as: the science of identifying, measuring, and communicating economic data to make business decisions for the future.
A Brief History of Accounting Science
(Please Bear With me while I Get A Little Nerdy)
The science of accounting is as old as the science of engineering and corresponds with the development of mathematics itself. The earliest accounting records were found over 7,000 years ago among the ruins of Ancient Mesopotamia.
In the 8th century Persia, scholars were confronted with the Koran's requirement to keep records of indebtedness as part of an obligation to account to God on all matters of life. This became particularly difficult when it came to inheritance, which demanded detailed accounting for the estate after the death of an individual. The assets remaining after the payment of funeral expenses and debts were allocated to every member of the family in fixed shares and included wives, children, fathers, and mothers. This required extensive use of ratios, multiplication, and division that depended on the mathematics of Hindu-Arabic numerals.
The inheritance mathematics were eventually solved by a system developed by a medieval mathematician (known in Europe as Algorithmi from which we derive "algorithm"). This system established the mathematics of algebra and addressed double-entry bookkeeping, required for the solution of the inheritance allocations.
Clearly, I am trying to establish accounting's science credentials in the minds of construction professionals. This brief history points up the ancient roots of accounting in the very evolution of mathematics. As stated in an earlier blog post, we would not consider going forward with a construction project without the completed engineering. It is my contention that you should make no business decisions without the application of accounting measurements and evaluations - before you move forward. Your CFO is a trained “business engineer” whose science can keep you out of trouble. Our industry must begin to recognize this and if we fail to do so it will be at our own peril.
The next three messages will demonstrate the use of the mathematical science of accounting in estimating and bid preparation, controlling ongoing operations, planning the future of the business and, finally, communicating the company's financial status to stakeholders like sureties, bankers, and stockholders. Tune in next week for a little deeper dive on this topic.