Construction Financial Glossary
Welcome to the Construction Financial Glossary, your essential resource for understanding the financial terms and concepts unique to construction. This glossary is crafted for both industry professionals and newcomers, covering everything from basic budgeting to advanced cost management.
Whether you’re overseeing project finances, managing cash flow, or preparing cost forecasts, you’ll find the definitions you need here. Stay informed and make confident decisions on every project.
A
Actual Cost of Work Performed (ACWP)
Actual Cost of Work Performed (ACWP) is a key metric in Earned Value Management (EVM) that represents the total cost incurred for completed work during a specific period.
Advance Billing
Advance billing is the process of billing the client for certain project costs upfront.
Allowance
An allowance is a budgeted amount set aside in a construction contract for items that have not been fully specified at the time of bidding.
Architect
An architect is responsible for designing the construction project, preparing drawings, and ensuring that the design complies with the client’s requirements and regulatory standards.
B
Back Charges
Back charges are deductions made by a general contractor from a subcontractor’s payment due to costs incurred from the subcontractor’s failure to meet contract requirements.
Bid Bond
A bid bond is a financial guarantee provided by a contractor as part of a project bid, ensuring that if awarded the contract, they will enter into an agreement and provide the required performance and payment bonds.
Bill of Quantities (BoQ)
A Bill of Quantities (BoQ) is a detailed document listing all materials, labour, and parts required for a construction project.
Billable Rates
Billable rates refer to the hourly or unit-based costs charged by contractors, subcontractors, or consultants for labor, equipment, or services provided on a construction project.
Bonding Capacity
Bonding capacity refers to the maximum amount of work a contractor can undertake at one time, as determined by their surety bond provider.
C
Capital Expenditure (CapEx)
Capital Expenditure (CapEx) refers to funds used to acquire or improve long-term assets such as machinery, buildings, or land.
Cashflow Forecast
A cashflow forecast is a projection of anticipated income and expenses over the course of a project.
Change Directive
A change directive is an instruction issued by a project owner or architect that requires a contractor to proceed with a change in work before the cost or schedule impact has been fully agreed upon.
Client
The client is the individual or organisation that commissions the construction project.
Commitments/Liabilities
Commitments or liabilities refer to the obligations or debts that a contractor is required to pay.
Consolidated Invoices
A consolidated invoice combines multiple invoices into a single billing statement, simplifying the payment process for construction firms that manage numerous subcontractors, vendors, or suppliers.
Construction Accounting Software
Construction accounting software is a specialized financial management tool designed for contractors, subcontractors, and project owners.
Construction Management at Risk (CMAR)
Construction Management at Risk (CMAR) is a contract where the construction manager agrees to a Guaranteed Maximum Price (GMP) and assumes responsibility for cost overruns beyond that price.
Construction Manager
A Construction Manager works on behalf of the client to oversee the execution of the project, ensuring that timelines, quality standards, and safety protocols are met.
Contingency Budget
A contingency budget is a set amount reserved in the overall project budget to cover unexpected costs or unforeseen changes during construction.
Cost Accruals
Cost accruals refer to expenses incurred but not yet paid for in a construction project.
Cost Breakdown Structure (CBS)
A cost breakdown structure (CBS) is a detailed framework that categorizes all costs associated with a construction project.
Cost Code
A cost code is a unique identifier used to categorize and track project expenses.
Cost Escalation
Cost escalation refers to the increase in construction project costs over time due to factors such as inflation, material price fluctuations, labor shortages, or changes in regulatory requirements.
Cost Forecasting
Cost forecasting is the process of predicting future construction expenses based on current project data, historical trends, and anticipated risks.
Cost Value Reconciliation (CVR)
Cost Value Reconciliation (CVR) is a financial analysis process that compares the value of work completed against actual project costs.
Cost-Loaded Schedule
A cost-loaded schedule integrates project costs into the construction schedule, linking expenditures to specific project activities.
Cost-Plus Contract
A Cost-Plus Contract reimburses the contractor for actual project costs, including materials and labour, plus a fixed fee or a percentage of the total cost.
Cost-to-Complete
Cost-to-complete refers to an estimate of the remaining expenses required to finish a construction project.
Credit Notes
A credit note is a financial document issued by a contractor or supplier to correct an invoicing error, refund a client, or adjust previously billed amounts.
D
Defect Liability Period
The defect liability period (DLP) is a set timeframe after a construction project is completed during which the contractor is responsible for repairing any defects that arise.
Deferred Payment Schedule
A deferred payment schedule is a financing arrangement in which payments for construction work are delayed and spread over a set period rather than being due immediately upon completion.
Depreciation Schedule
A depreciation schedule outlines how the value of construction assets—such as machinery, tools, and vehicles—declines over time.
Design-Build Contract
A Design-Build Contract combines design and construction services under one contract, with a single contractor responsible for both the design and execution phases.
Developer
A developer is the party responsible for financing and overseeing the construction project.
Direct Costs
Direct costs refer to expenses that can be directly attributed to a specific construction project.
Draw Request
A draw request is a formal document submitted by a contractor to request payment for work completed during a specific phase of a construction project.
E
Earned Value Management (EVM)
Earned Value Management (EVM) is a project management methodology that integrates cost, schedule, and performance data to assess project progress.
Engineer
An engineer provides technical expertise for various aspects of the construction project, including structural, civil, and mechanical systems.
Escalation Clause
An escalation clause is a contract provision that allows for adjustments in project costs due to fluctuations in material prices, labor rates, or inflation.
Expense Allocation
Expense allocation is the process of distributing costs across different projects, departments, or cost centers to ensure accurate financial reporting and budget management.
F
Final Account
The final account is the comprehensive financial statement issued at the end of a construction project, summarizing all costs, payments, variations, and adjustments.
Framework Agreement
A Framework Agreement is an overarching contract that allows a client to enter into multiple projects or works with the same contractor over a specified period.
Front-Loaded Billing
Front-loaded billing is a practice where contractors allocate a higher portion of costs to early project phases, ensuring positive cash flow before later, more expensive work begins.
G
General Conditions
General conditions refer to the indirect costs necessary for managing a construction project but not directly tied to physical construction work.
Guaranteed Maximum Price (GMP) Adjustment
A GMP adjustment modifies the guaranteed maximum price in a cost-plus contract due to project scope changes, unforeseen conditions, or negotiated revisions.
Guaranteed Maximum Price (GMP) Contract
A Guaranteed Maximum Price (GMP) Contract sets an upper limit on project costs, ensuring that the client is protected from budget overruns.
I
Indirect Costs
Indirect costs in construction are expenses that are not directly tied to a specific project activity but are necessary for overall project execution.
Integrated Project Delivery (IPD)
Integrated Project Delivery (IPD) is a collaborative contract that aligns the interests of all parties involved in the construction project by sharing both risks and rewards.
Interim Payment
An interim payment is a partial payment made throughout the duration of a construction project as work is completed.
Invoice Reconciliation
Invoice reconciliation is the process of verifying that all costs on an invoice align with project records and agreements.
J
L
Lien Waiver
A lien waiver is a legal document in which a contractor, subcontractor, or supplier waives their right to file a lien against a property after receiving payment.
Liquidated Damages
Liquidated damages are pre-agreed financial penalties outlined in a contract, payable by a contractor to the owner for failing to meet project deadlines or performance requirements.
Lump Sum Contract
A lump sum contract is a fixed-price agreement where the contractor agrees to complete the work for a set fee.
M
Main Contractor
The Main Contractor is the primary contractor responsible for overseeing the entire construction process.
Markup
Markup refers to the percentage added to the cost of a service or product in construction, allowing contractors to cover overhead and generate profit.
Material Price Escalation Clause
A material price escalation clause is a contract provision that allows for price adjustments if material costs rise significantly due to market fluctuations.
Mobilization Cost
Mobilization cost refers to the expenses incurred at the start of a construction project to prepare the site, transport equipment, and deploy the workforce.
N
O
Overbilling
Overbilling occurs when a contractor invoices the client for work that has not yet been completed.
Overhead Allocation
Overhead allocation is the process of distributing indirect costs, such as administrative expenses, rent, and utilities, across various construction projects.
Overhead Costs
Overhead costs are the indirect costs associated with running a construction business, such as administrative expenses, rent, utilities, and insurance.
Owner Contingency
Owner contingency is a budgeted reserve set aside by project owners to cover unexpected costs, design modifications, or unforeseen issues that arise during construction.
Owner Financing
Owner financing occurs when a project owner provides direct funding for a construction project rather than securing a loan from a traditional financial institution.
P
Pass-Through Costs
Pass-through costs are expenses incurred by a contractor that are directly charged to the project owner without markup.
Pay-When-Paid Clause
A Pay-When-Paid clause is a contractual provision that delays payment to subcontractors until the general contractor receives payment from the client.
Payment Application
A Payment Application is a formal request from a contractor to the client, seeking payment for completed work based on project progress.
Performance Bond
A performance bond is a financial guarantee issued by a surety company ensuring that a contractor will complete a project according to the terms of the contract.
Preliminary Costs
Preliminary costs, also known as pre-construction costs, are expenses incurred before actual construction work begins.
Prepayment
Prepayment refers to an advance payment made to secure services or materials before they are delivered or work is performed.
Profit Fade
Profit fade occurs when a project’s final profit margin is lower than originally estimated due to cost overruns, mismanagement, or unforeseen expenses.
Profitability Forecasting
Profitability forecasting is the process of predicting the expected profit margins of a construction project by analyzing projected costs, revenue, and potential financial risks.
Progress Billing
Progress billing is a payment structure where contractors invoice clients based on work completed rather than waiting for full project completion.
Project Cost Breakdown
A project cost breakdown is a detailed summary of all expenses associated with a construction project, categorized by cost type.
Project Manager
A Project Manager oversees the planning, resource allocation, and tracking of project milestones in construction.
Punch List Holdback
A punch list holdback is a portion of the final project payment that is withheld until all outstanding punch list items are completed.
Purchase Order (PO)
A Purchase Order (PO) is a formal document issued by a buyer authorizing the purchase of goods or services.
Q
R
Request for Quotation (RFQ)
A Request for Quotation (RFQ) is a formal document used by contractors to request pricing information from suppliers or service providers for specific materials or services.
Retention
Retention is a portion of payment, typically 5-10%, that is held back until the project is completed.
Retention Bond
A retention bond is a financial guarantee issued by a contractor to replace the need for retainage in a construction contract.
S
Schedule of Values
A Schedule of Values (SoV) is a detailed breakdown of the total contract sum, divided into specific work items with assigned values.
Stored Materials
Stored materials refer to construction supplies purchased but not yet installed.
Subcontract
A subcontract is an agreement where a primary contractor hires a secondary party, or subcontractor, to perform specialized tasks within a larger construction project.
Subcontractor
A subcontractor is a specialist hired by the main contractor to perform specific tasks within a construction project.
Substantial Completion
Substantial completion marks the stage in a construction project where the work is complete enough for the owner to use the facility, even if minor tasks remain.
Supplier
A supplier provides the materials and equipment needed for construction projects.
T
Target Cost Contract
A Target Cost Contract sets an estimated target cost for the project, with incentives for the contractor to stay within this target.
Time and Materials (T&M) Contract
A Time and Materials (T&M) Contract allows the contractor to bill for materials used on the project, plus an hourly or daily labour rate.
U
Underbilling
Underbilling happens when a contractor invoices for less than the work completed, often unintentionally.
Unit Cost Estimate
A unit cost estimate is a pricing method where construction costs are broken down into cost per unit, such as per square foot, cubic yard, or labor hour.
Unit Price Contract
A Unit Price Contract is an agreement where the contractor sets a fixed price for each unit of work, such as “per mile” or “per square meter”.
V
Valuation
Valuation is the assessment of completed work used to determine interim payments throughout a construction project.
Value Engineering
Value engineering is a systematic approach used in construction to optimize project costs while maintaining or improving functionality.
Variance Analysis
Variance analysis compares budgeted costs to actual costs to identify discrepancies in a project’s financial performance.
Variation
A variation is an amendment to the original contract that adjusts the scope, cost, or timeline of a project.
W
Work Package Costing
Work package costing is the process of breaking down a construction project into smaller, manageable units—called work packages—and assigning costs to each.
Work-in-Progress (WIP) Report
A Work-in-Progress (WIP) report is a financial document that tracks the progress of a construction project by comparing actual costs and revenues against the budgeted amounts.
Workforce Burden Rate
The workforce burden rate represents the total cost of employing a worker beyond their base wages.