Construction Accounting, Disruptions & Life-Cycle Costing

Project 1 –

On 1 April 2024, Sizasiza Construction (Pty) Ltd commenced a contract scheduled for completion by 30 June 2025 at an agreed contract price of R5,347,892.37 (five million three hundred forty- seven thousand eight hundred ninety-two rand and thirty-seven cents, VAT-exclusive). Sizasiza’s financial year ends on 31 December 2024. By that date, expenditure incurred to date

(before escalation) totalled R2,728,580.57, as follows:

By year-end, work certified totalled R3,651,278.49 (three million six hundred fifty-one thousand two hundred seventy-eight rand and forty-nine cents). In line with the 10% retention on each certificate, cash received equals 90% of the certified amount, i.e. R3,286,150.64 (three million two hundred eighty-six thousand one hundred fifty rand and sixty-four cents).

Additional information

1. Escalation: The contract includes an escalation clause. During 2024, escalation amounted

to 6.18% of the direct costs (Materials, Wages, Sundry Expenses) incurred to 31 December 2024.

• Estimated Costs to Complete (from 1 January 2025):
  • Wages:                                               R458,923.77
  • Materials:                                           R563,210.98
  • Sundry Expenses:                               R94,382.16
  • Additional Plant required:                   R247,531.41
  • Head Office Charges:                          R63,214.59
  • Contingency (management estimate): R147,500.33

• Uncertainties at 31 Dec 2024:
• At year-end, R327,456.21 of the certified work is being contested by the client and payment has been withheld pending resolution.
• A variation order of R512,345.67, for costs expended on a change from the client has been submitted but not yet approved.

• Certificates carry a 10% retention until practical completion (already reflected in the 90% cash received).

• All figures are VAT-exclusive. Round monetary answers to the nearest cent and show all workings.

You are required to:

1. Compute the profit to recognise in the Income Statement for the year ended 31 December 2024 using the percentage-of-completion method under both bases below:
   1. Cost basis
   1. Contract price basis

• In 200–250 words, critically evaluate how the choice of revenue recognition method (e.g., Percentage of Completion vs. Completed Contract) and the use of construction-specific financial statements influence the reliability and usefulness of financial information for South African construction firms.

Project 2 –

Over the past two decades, the South African construction industry has faced significant disruptions that have reshaped the micro-economic environments in which firms operate. These disruptions include, but are not limited to, political and policy changes, infrastructure investment cycles, global financial crises, commodity booms and slumps, labour unrest, regulatory reforms, state capture and corruption scandals, technological change, climate pressures, the rise of the construction mafia, and most recently, the COVID-19 pandemic.

You are required to:

In essay format, critically analyse the impact of three major disruptions that occurred in the South African construction industry between 2005 and 2025, with particular attention to the microeconomic effects on firms. In your essay:

1. Identify and justify your choice of three major disruptions that have significantly altered the operating environment of South African construction firms. Situate these disruptions within their broader national and global contexts.
   1. Analyse how these disruptions influenced the micro-economy of construction firms. Draw explicitly on industry data, academic studies, or government/industry reports.
   1. Evaluate how firms have responded to these disruptions, considering adaptive strategies, resilience practices, and shifts in business models. Critically assess the effectiveness of these responses.
   1. Reflect on what these disruptions reveal about the structural vulnerabilities and adaptive capacities of the South African construction industry. What lessons can be drawn for how firms should anticipate and prepare for future shocks?

Use only credible, scholarly, and industry sources (e.g., peer-reviewed journal articles, CIDB annual industry reports, Statistics South Africa data, National Treasury and DBSA publications, World Bank/IMF reports, and reputable industry press). Proper Harvard in- text referencing and a complete reference list are mandatory. Sources such as Wikipedia, Newspaper outlets, Politician Speeches etc should be avoided.

Project 3 –

Life Cycle Costing (LCC) is positioned as both a financial appraisal tool and a strategic decision- making framework in construction projects.

You are required to:

Critically evaluate the role of LCC in advancing sustainable and cost-effective construction practices in South Africa over the past two decades. In your essay:

• Analyse how LCC contributes to long-term decision-making in construction projects, particularly in balancing upfront capital costs against operational, maintenance, and end-of- life costs. Consider its relevance for both public infrastructure and private sector developments.
• Examine how LCC has been applied (or underutilised) in supporting sustainability objectives such as energy efficiency, carbon reduction, and resource optimisation. Draw on international and South African examples or case studies.
• Critically assess barriers to widespread adoption of LCC in the South African context.

Support your discussion with evidence from peer-reviewed academic studies, government or industry reports, and credible case material.

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Accounting Assignment Answers: Expert Answers on Above Construction Accounting

Project 1: Accounting for construction contract

As per the given information, the contract price is R5347892.37, the cost are R2728580.57 before escalation, worker certified to R3651278.49, escalation clause: 6.18% of direct costs, the cost to complete as estimated is wages: R458923.77, materials: R563210.98, Sundry: R94382.16, Headoffice charges: R63215.59 and contingency: R147500.33
Calculation of escalation and cost to date
Direct cost = materials + wages + sundry = R2324855.09
Escalation is 6.18% so R143676.04
Cost incurred including escalation: R2872256.61
Total estimated costs to complete including wages, materials, sundry, plant, head office and contingency is R1574763.24
Total expected contract cost: R4447019.85
Profits to recognise: R582481

Short Critical Evaluation

Percentage of completion takes into account the revenue and profit progressively as the work is carried out. This allows for timely matching of revenue with the cost. In respect to the completed contract method, it defers all the profit recognition until the project is completed. With respect to South African construction firms, percentage of completion helps in improving the usefulness and decision relevance for users. But it relies on estimates of total cost and cost to complete, estimation errors can directly miss state the profit. The completed contract method is conservative and it can encourage short term planning to defer recognition.

Three major disruptions in South African construction

The Three major disruptions include the global financial crisis of 2008-2009 state capture, corruption and procurement failures, and covid 19 pandemic associated lockdowns. The microeconomic effect on firms can be identified from the fact that it leads to cancellation and postponement of projects, decrease in demand for construction services, and firms faced reduced capacity utilization. There was volatility in the input price and supply chain adversely affected, and issues of financing and credit risks were also faced by firms.

Short critical evaluation

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