Construction Finance Glossary
Welcome to the Construction Finance 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 guarantee, usually issued by a surety or insurance company, that protects the project owner if a contractor wins a tender but then refuses to sign the contract or arrange the performance and payment bonds it promised.
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, or CapEx, is money a construction business spends to acquire or improve an asset it expects to use for more than one accounting period, such as a crane, a fleet vehicle or a new depot.
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)
CVR means cost value reconciliation.
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 is a table that spreads the cost of a long-life asset, such as a crane, an excavator, or a fleet vehicle, across the years it is expected to be in use, rather than expensing the full purchase price in the year it was bought.
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 are expenses that can be traced to one specific project, or even one specific cost code within it, such as labour, materials, equipment hire and subcontractor work carried out on that job.
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 method for measuring project performance that compares three figures at a given point in time: the value of work that was scheduled, the value of work actually completed, and what that completed work cost to produce.
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 are the costs of running and supervising a construction site that aren’t tied to any single trade, such as a site manager’s salary, temporary power and water, site offices, and project insurance.
Guaranteed Maximum Price (GMP) Adjustment
A guaranteed maximum price (GMP) adjustment is a formal change to the spending cap in a GMP contract, agreed between owner and contractor through a change order.
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 payment made during a construction project for the work done so far, instead of one lump sum at the end.
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 document a contractor, subcontractor or supplier signs to give up their right to file a mechanic’s lien against a property for a specific amount of work or payment.
Liquidated Damages
Liquidated damages are a sum of money, agreed in the contract before work starts, that a contractor owes the owner for each day or week a project runs past its agreed completion date.
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 business that holds the primary contract with the client and carries overall responsibility for delivering the project, coordinating the trades and subcontractors needed to complete it.
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 is an arrangement where the project owner funds construction directly from their own capital or a private facility, rather than drawing on a construction loan from a bank.
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 guarantee, usually issued by an insurer or bank acting as surety, that protects the client if a contractor fails to carry out the contract, most often because of insolvency or abandonment of the site.
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 method where a contractor invoices the client for the portion of work completed during a billing period, rather than waiting until the whole project is finished.
Project Cost Breakdown
A project cost breakdown is an itemised list of everything a construction project is expected to cost, split into categories such as labour, materials, equipment, subcontractors and general conditions.
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 the portion of a contractor’s final payment that an owner or general contractor withholds until every item on the punch list, the record of minor defects and unfinished work noted at substantial completion, has been fixed.
Purchase Order (PO)
A purchase order, or PO, is a formal document a buyer issues to a supplier or subcontractor, setting out what is being bought, at what price, in what quantity and on what terms, before the work or delivery happens.
Q
R
Request for Quotation (RFQ)
A Request for Quotation (RFQ) is a document a contractor or buyer sends to suppliers or subcontractors asking for a firm price against a clearly defined scope, such as a quantity of material or a single trade package.
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 pays the contractor for the actual hours worked, at an agreed labour rate, plus the cost of materials used, rather than a fixed price agreed in advance.
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 structured review of a project’s design, materials, and construction methods, carried out to find a way to deliver the same function at a lower cost, or more function at the same cost.
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 is the cost of employing a worker on top of their base wage, expressed as a percentage of that wage or folded into a fully burdened hourly rate.
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