Construction Accounting Basics
Accounting is one of the most important aspects of management and administration in business. In firms with several moving parts, an accounting team that accurately tracks the movement of assets into and out of the company is necessary. This ensures both transparency and profitability. In the construction industry, firms and contractors face unique challenges when it comes to accounting. In this resource article, we’ll look at what those challenges are, identify the key differences between construction and regular accounting practices, and emphasize the importance of adopting a software solution. The software can improve your accounting and help you earn more money as a construction company or subcontractor.
What’s Unique About Accounting in Construction?
Whether you’re laying the bricks or keeping the books, it’s important to understand that construction accounting is different from regular accounting. A typical business like a restaurant or grocery store uses typical accounting principles. This model works perfectly for that type of business – selling products from a fixed location. The business understands the cost of each item it sells and overhead is kept relatively constant.
In contrast, construction businesses offer customized work in novel locations regularly and are often mobile. Thus, construction companies must monitor totally different categories of costs. These include travel time, mobilization costs such as packing tools and equipment, delivery of materials to the job site, and even clearing the job site of excess materials once a job is completed. In a sense, the business has no fixed location and it is moved to wherever the customer needs it, along with the materials necessary for the job. This can create many indirect costs that must be taken into account when looking at your financial statements.
Construction companies also use the Percentage of Completion Method, where revenue is accounted for based on the estimated profit of a contract and what percentage of that project has been completed. With a completed contract, the payment would be the full amount, but it is not uncommon for contracts to be left unfinished. This makes it even more critical that construction firms implement cost-accounting methods that enable accurate tracking of their expenses to accurately project profit and loss.
Key Differences between Regular and Construction Accounting
• Sales – Regular businesses account for sales and usually offer 1-5 categories of products and services. Construction businesses offer a greater range of service categories – service work, consulting, engineering, labor costs, design, physical products and materials, and more. With all of these service categories, it can be more difficult to keep track of every expense or profit coming from each category. Revenue recognition can be tricky as well due to the many categories and each cost associated with each.
• Cost of Goods Sold – Regular businesses simply record the cost of the product sold. In construction accounting, it is never so simple. Each job incurs both direct and indirect costs that fall into hundreds of categories. Keeping track of these direct and indirect costs can be complicated, especially when they are coming from all different categories. Implementing a software platform that can keep track of these costs for you can save you time and money.
• Expenses/Overhead – In regular businesses, the distinction between Cost of Goods Sold and Overhead is very clear, but this is not the case in construction. Many of the items that grocery stores would call “Overhead” fall into the “Cost of Goods Sold” category in construction because they are directly connected to the customer’s project. It is important to know the distinction between the two when it comes to construction accounting because it can be tricky.
• Break Even – In regular businesses, the direct relationship between income and expenses makes breakeven points very easy to calculate. In construction, however, there are far too many categories of items to easily understand how to break even on a project. Additionally, most projects are one-of-a-kind custom jobs, with intricate requirements and a variety of associated costs. Since the relationship between income and expenses can be intricate, it can be helpful to have a software to keep track of income and expenses for you.
Project Accounting Technologies for Construction Companies
Construction accounting is significantly more complex than it is for most businesses. Being able to track, report, and categorize costs and other expenses in your construction business is important for understanding how to bid on projects, which projects are profitable for your business, how to bill clients accurately and fairly, and how to make the most of your firm’s resources.
Accurate job costing currently requires daily reports to be generated in the field and submitted to the accounting department on a regular basis. Accountants must manually enter the reports into the accounting system regularly, a process that is time-consuming and generates backlogs on paperwork.
An integrated software platform that allows frontline workers to complete and submit daily cost and progress reports, time cards, and change orders is an effective way to keep track of what costs are being incurred during a construction project. Better yet, the reports are instantly digitized and accessible to both workers in the field and the accounting office, which enables rapid resolution of any costing issues and accurate tracking to ensure profitability. The software platform can work to be the line of communication between the field and the accounting office. Errors become minimal the more information is communicated.
Improving your construction company accounting procedures starts with an understanding of the different types of costs you can incur working on a project. The next step is to categorize those costs effectively, understanding the nuances between expenses/overhead and cost of goods sold, and appreciating the complexity of the projects that your firm is capable of. The best way to ensure accurate accounting is to implement a software solution that allows workers at your firm to easily submit data on costing through a platform that is integrated with your accounting software. This software platform can easily communicate information so that everyone is informed This practice saves time on paperwork and ensures that important data is never lost, making your firm more profitable as a result.