Success in the construction industry depends on accurate and efficient accounting just like in any other sector. However, because of the distinct ways that construction organisations operate, construction accounting is a specialist field even though it is based on normal accounting concepts.

In addition to supporting their companies in managing industry standards including retainage, specific billing and revenue recognition systems, and tracking frequent change orders, construction accountants concentrate on controlling the cost and profitability of big, individual projects as opposed to product lines.

Construction accounting usually calls for specific accounting knowledge because it incorporates specialist ideas.

What is meant by Construction Accounting?

The specific financial and operational requirements of the construction sector are met by the specialist field of accounting known as construction accounting. It tackles the particular difficulties that construction projects bring, like extended schedules, intricate costing schemes, and contractual duties. Construction accounting is focused on particular projects, making sure that each is financially feasible and rigorously monitored from start to finish, in contrast to traditional accounting, which is concerned with normal company operations.

Construction Accounting vs Traditional Accounting

The primary distinction between construction and standard accounting is that the former necessitates that companies keep track of numerous projects simultaneously, along with detailed cost breakdowns for every contract. A construction accounting procedure can manage contracts that continue for several years, in contrast to traditional accounting, which typically measures earnings annually or quarterly. Additionally, construction accountants manage a number of aspects of business operations, such as progress billings, client deposits, and non-billable costs, that regular accountants hardly ever monitor.

Key Components of Construction Accounting

Although there are numerous approaches to construction accounting, they all generally have certain essential features in common. These fundamental guidelines will help you keep track of all the different costs associated with a project. The following are important components of construction accounting:

Project-Based Accounts:

Instead of concentrating on the overall operations of a company, construction accounting concentrates on specific projects. Although the contractor’s overall income and expenses are influenced by all of these projects, construction accounting is primarily concerned with controlling costs and profitability for individual projects. Rather than following a set procedure, they are therefore better able to keep an eye on the requirements and specifications of every project.

Decentralised Production

Accountants in the construction industry sometimes work for decentralised companies those that conduct business in several locations at once. It is crucial that these businesses keep track of the movements of their supplies and machinery between locations. It is imperative for contractors to maintain precise documentation of mobilization expenditures in order to furnish their clients with bills that fairly reflect their overall outlays.

Long-Term Contracts

Another crucial component of construction accounting is monitoring the status of long-term contract projects. The completion of construction projects can frequently take several months or even years. Since many companies depend on contracts to pay for their manufacturing costs, accountants frequently have to keep track of every item related to long-term agreements.

Job Costing

Managing each project as a distinct account is known as “job costing.” With job costing, construction accountants may record each project as if it were a separate business. Thanks to job costing, construction accountants may keep tabs on project-specific spending without charging customers for out-of-scope items.

Contract Revenue Recognition

The practice of handling every project as a separate account is called “job costing.” Construction accountants can record each project as if it were a distinct business by using job costing. Construction accountants can monitor project-specific expenses with job costing and avoid billing clients for items that are outside of their scope of work.

7 Distinct Approaches to Construction Accounting

The following are seven distinct approaches to construction accounting that you may find useful:

Cash Method

Construction accountants can keep track of the amount of money a contractor receives and spends by using the cash method. When employing the cash approach, contractors only report income when they get paid by the client and only record expenses when they really spend money on things like supplies or equipment. Since the cash approach allows contractors to easily handle their contracts without creating accounts payable or receivable, many of them opt to use it.

Completed Contract Method

When contractors use the completed contract technique, they keep track of their costs during the course of a building project but do not issue an invoice until the work is finished. This method allows contractors to send a single invoice at the end of a project rather than several invoices during the course of the project, therefore they usually utilise it on shorter projects. With this approach, contractors and clients can agree on a price before construction starts through a streamlined procedure, which makes it helpful for projects with few moving parts.

The Percentage of Completion Method

When contractors accomplish specific building milestones, they can submit invoices using the percentage of completion technique. For instance, the builders might be paid when the wiring in a building is installed or the frame of a house is completed. With this approach, contractors are able to request payment at any point over the course of a project, as opposed to only at the conclusion. On projects that take years to finish, some contractors opt for the percentage of completion strategy since it allows them to get paid over the course of the lengthy process.

Contract Retainage Method

Contract retainage is the client’s right to withhold a portion of the contractor’s total payment until the project’s completion and the client is satisfied. Retainer contracts allow clients to withhold payment until they are satisfied with the construction. In order for contractors to know what they expect, clients usually specify what a satisfactory outcome is while writing the contract.

Fixed Price Method

Contractors that use the fixed price method provide a precise, all-inclusive project cost. For projects that call for several bids from various contractors, this approach is frequently used. Requesting fixed-price bids gives clients the opportunity to assess their options and select the contractor most suited to finish building projects within their budgetary constraints. Usually, contractors provide a finished construction plan with all of the expenses they anticipate incurring during construction as part of the bidding process.

Time and Material Method

Under the time and material technique, contractors keep track of their costs during the building process and send in bills as the project moves along. The contractor stands to gain the most from this approach since it enables them to bill the client for any unforeseen expenses that may arise during construction. Contractors can provide the client with itemized listings of labour, material, and equipment expenses when using the time and material technique. An impartial third party may examine each invoice to make sure the information is correct, depending on the terms of the agreement between the two parties.

Tips for Construction Accounting

Research Compliance Laws

The design of your accounting system may be subject to compliance laws in the jurisdiction in where your business is located. Understanding these crucial needs can be facilitated by devoting some time to investigating the compliance standards in your area.

Track Inventory Thoroughly

Construction accounting requires you to keep an eye on your inventory of materials. Maintaining meticulous records of the materials used in construction might assist you in handling the reimbursement process, as you will need to provide clients with itemized invoices.

Manage Your Potential Liability Risks

Effective risk management of your liabilities is crucial when creating a contract. It could be beneficial to go over the terms of any contracts with a lawyer or other legal expert before signing them to make sure you understand them, and then to develop strategies for contingency in case something unforeseen happens.

Track Labour Costs

An essential component of construction accounting is labour cost tracking. To ensure that you can recruit enough construction workers for the job, think about creating an accurate labour cost estimate before submitting bids.

Conclusion

Construction projects are special in that they have lengthy deadlines, substantial budgets, and intricate contracts, all of which call for the use of certain accounting techniques to guarantee sound financial management. Inaccurate financial reporting, lost income, and legal problems may result from not adhering to these standards.