Construction industry accounting versus traditional accounting – what’s the difference? It’s easy to assume that basic accounting will suffice for a construction company, but your industry has unique financial considerations and challenges that will shape your accounting processes.
Let’s take a closer look at some of the many unique aspects of construction accounting.
One unique aspect of construction accounting is job costing.
Job costing tracks all of a project’s costs, including materials, labor, and overhead. It provides a detailed breakdown of your projected costs, allowing you to track your expenses in real-time and calculate future profitability.
In construction accounting, job costing is important for several reasons. For example, it allows you to:
Software can help simplify and streamline the job costing process, saving businesses time and allowing them to generate more accurate estimates.
A work in progress (WIP) report helps construction companies understand whether a project is:
WIP plays a crucial role in construction accounting because it helps businesses manage and understand their cash flow. It also helps businesses understand what’s been completed and what’s left to do, allowing them to manage their budgets more effectively.
Reports typically include:
WIP reporting allows construction businesses to create more accurate financial statements and take a proactive approach to project management.
For example, if your WIP report shows that a project is 35% complete but has already used 75% of the budget, it’s likely that the project will go over budget. Knowing this early on allows you to take action and address the issue before it escalates and you wind up under-billing the client.
Construction accounting also differs when it comes to revenue recognition. While there are many ways construction companies can handle revenue recognition, the percentage of completion method is one of the most common methods.
With the percentage of completion method, revenue and expenses are recognized based on the percentage of work that’s been completed during the period. Simply put, income and expenses are recognized as the project progresses. In most cases, this is on a monthly basis.
Here’s how it works:
Although the percentage of completion method is ideal for long-term construction projects, it’s not without complexities and challenges. When the recognized revenue and expenses differ from the actual amounts spent and received on a project, cash flow issues can arise.
Construction companies often rely on project management software to ensure projects go smoothly and stay on budget. Integrating project management solutions into accounting software like QuickBooks improves accuracy and efficiency while providing real-time monitoring.
Although workflow integrations are common with traditional accounting, construction is unique in that each project will have individual costs and revenue that must be carefully tracked and managed.
Construction companies need to consider their software solutions carefully to ensure they work together seamlessly. Fortunately, QuickBooks integrates with many popular project management solutions.
Typically, businesses are paid when they deliver a product or service to a client. Construction companies differ in the way they are paid by clients, and sometimes, they don’t get paid. Cash flow issues are a very real concern for construction companies for this reason.
Construction companies may use a variety of payment models:
Ideally, clients would pay a deposit and then make progress payments. Late fees would be imposed if payments aren’t made promptly. Taking this approach helps ensure steady cash flow throughout the project.
Without proper management of client payments, cash flow issues can quickly arise and make it difficult to stay afloat. Here’s where it pays to have an experienced accountant who understands the challenges construction companies face when it comes to getting paid. They can help you better manage your cash flow and ensure clients are paying promptly.
Construction companies may use different pricing models, which will also impact their accounting. While there are many ways to price projects, two of the most common ones are:
Each type of pricing model will require careful management and tracking to keep the project on track and cash flow consistent.
Construction companies may work with subcontractors, have an in-house team, or a combination of both. This can complicate payroll and accounting.
Both types of labor have advantages and disadvantages.
It’s important for construction companies to understand how subcontractors and in-house employees will impact their accounting, payroll, and compliance needs.
Construction accounting differs from traditional accounting in many ways, from job costing to labor, pricing, revenue recognition and more. With unique challenges and needs, it’s important to work with an accountant who specializes in the construction industry.
To learn more about how Beyond Books Solutions can help you with construction accounting or to schedule a call, get in touch here.