Construction in Process (CIP) Accounting
The purpose of this assignment is to discuss what a construction in process account is and why it is important to use. You will compare this to a similar accounting approach used in manufacturing products for sale
As we know, developers start incurring costs early in the development process. Once a development opportunity is identified, due diligence begins.
The developer starts spending both time and money in an attempt to quickly determine whether the project is feasible. It is important for the developer to have the ability to budget due diligence costs, and then track them as the money is spent.
This assignment asks you to consider how to track due diligence and development costs. Most developers and development courses focus on proformas, valuation, IRR, NPV, ROE, multiple, etc. However, a very important part of managing a development project is understanding the accounting side.
This assignment requires you to discuss Construction in Process (CIP) accounting. Specifically:
What are CIP accounts?
Are these balance sheet or income statement accounts and why?
How are they used in real estate development?
Provide an example of how cost tracking might be similarly used in a manufacturing company
What happens to your CIP account if you decide to pass on the project?
Many people consider accounting to be a back office function that does not add much value to the development process.
However, when you begin to spend money on a project, especially other people’s money, financial reporting becomes very important.
Investors ask tough questions and expect you to know the answers, especially on financial matters.
Consider as you complete this assignment, that the audience really does not have an accounting background, and that this is your opportunity to enlighten them on this often overlooked aspect of real estate development.