The Relationship between Unbilled Accounts Receivable and Financial Performance of Construction Contractors

Minhyuk Jung, Shira You, Seokho Chi, Ilhan Yu and Bon-Gang Hwang
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Minhyuk Jung: Department of Civil and Environment Engineering, Seoul National University, 1 Gwanak-Ro, Gwanak-Ku, Seoul 08826, Korea
Shira You: Department of Civil and Environment Engineering, Seoul National University, 1 Gwanak-Ro, Gwanak-Ku, Seoul 08826, Korea
Seokho Chi: Department of Civil and Environment Engineering, Seoul National University, 1 Gwanak-Ro, Gwanak-Ku, Seoul 08826, Korea
Ilhan Yu: Korea Research Institute for Construction Policy, 13F Specialty Con. Bldg., 15 Boramae-ro 5-gil, Dongjak-gu, Seoul 07071, Korea
Bon-Gang Hwang: Department of Building, National University of Singapore, 4 Architecture Drive, Singapore 117566, Singapore

Sustainability, 2018, vol. 10, issue 8, 1-14

Abstract: Operating profit is one of the most important measures in financial statements to evaluate a organizational performance. In the construction industry, however, the profit has a possibility to be misestimated as a loss and can be included in Unbilled Accounts Receivable (UAR) and shown as a profit; this is due to the uncertainty of predicting a total construction cost and project progress on which the calculation of profit is based. UAR results from the different perceptions regarding project progress between clients and contractors and can include costs related to loss that cannot be acknowledged as a progress. Therefore, UAR can be a significant clue to understanding estimation errors of a contractor’s financial performance data. This study investigated the possibility of estimation error of contractors’ operating profit by analyzing the relationship between UAR and other relevant financial performance measures. The accounting data of 41 Korean major contractors was collected and analyzed based on the correlation analysis. The results of this study implies that the profit of construction companies has the possibility to contain estimation errors, causing a significant variance in the process of adjusting the evaluation errors at the end of projects, which can cause unexpected losses to investors. In addition, this study found that the UAR containing estimation errors could be different depending on market in which contractors operate; therefore, when dealing with contractors’ financial performance data, it is necessary to discern whether their profit data contains distortion and, in the case that errors are included, appropriate data preprocessing should be conducted for more reliable and sustainable construction investment and project management.

Keywords: construction accounting; unbilled accounts receivable; financial performance measures; percentage-of-completion method (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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