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

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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
    The Institute of Construction and Environmental Engineering (ICEE), 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)

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.

Suggested Citation

  • Minhyuk Jung & Shira You & Seokho Chi & Ilhan Yu & Bon-Gang Hwang, 2018. "The Relationship between Unbilled Accounts Receivable and Financial Performance of Construction Contractors," Sustainability, MDPI, vol. 10(8), pages 1-14, July.
    • Handle: RePEc:gam:jsusta:v:10:y:2018:i:8:p:2679-:d:160910
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    References listed on IDEAS

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    Cited by:

    1. Hyun Mi Ji, 2018. "The Usefulness of Accounting Information Derived by Applying the Percentage of Completion Method to Enhance Sustainable Business Practices: Evidence from South Korea," Sustainability, MDPI, vol. 11(1), pages 1-12, December.

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