Construction Accounting 101: A Simple Guide for Contractors

Most industries are either product or service based, but project based industries typically include both. This includes sourcing materials, labor, consulting, engineering, and more. This means meticulously tracking business expenses in each category in order to clear a reasonable profit margin.

It’s designed specially to help contractors track each job and how it affects the company as a whole. While it draws on all the same basic principles of general accounting, it also has several important and distinct features. This is especially helpful when trying to stay on top of your financial records. The installment method is used by many contractors when clients make payments over time. Revenue is recorded as soon as it is received from the client and in the construction accounting period that it is received. Completed construction contracts are typically used by most businesses for short-term contracts.

Turn business receipts into data & deductibles

Companies will need ways to track a number of different items with regards to any construction job. These include materials, the physical things the construction business will need to purchase to complete the job. These items are consumables, and most will be used up at the end of the project.

Separate accounts help you better determine how much money is coming into and out of your construction business. Additionally, you waste countless hours when tax seasons come around. Cash accrual accounting recognizes expenses and revenue in the time they are incurred before any money changes hands. The advantage of the accrual method is that it includes accounts receivables and account payables, as a result, provides a more accurate picture of the profitability of a company. The accrual is the most common method used and also a standard method under GAAP acceptance.

Recording Transactions

Companies need to decide whether to use cash-basis or accrual-basis accounting, and those working on long-term projects need to pick the right revenue recognition method. For some projects, the way a contractor manages change orders can determine whether the project is profitable or makes a loss. A solid accounting function contributes to the success of any construction company. Construction accounting requires specialized skills to support the construction industry’s unique practices in areas such as job costing, retainage and revenue recognition. Accounting software can help companies reduce administrative effort, simplify financial management and increase profitability. For most businesses, the accounting general ledger (G/L) is all they need.

Job costing also can help you determine which types of projects are profitable and which ones to avoid. Change orders are an essential and sometimes unavoidable part of the construction process. A change order is a written authorization to make changes to the original construction contract, such as changes to materials, pricing, labor costs, or deadlines for completion. Change orders are usually requested by the client, who may want additional features or services not included in the original contract. The basic principles of construction accounting include tracking job costs and revenue recognition.

What Is in a Labor Contract?

It is usually done each month so that you can catch any errors quickly. If you don’t have a bookkeeper, you’ll be responsible for reconciling your bank accounts. However, if you do have a construction bookkeeping bookkeeper, they will take care of it for you. Regardless of the option you choose for your bookkeeping needs, it is useful to understand the process involved in construction bookkeeping.

• Construction accounting software offers sophisticated functionality for job costing, complex payroll processing, equipment management, subcontracting and other financial management processes.
• It’s not unusual for a job to require more labor or materials than originally anticipated.
• Look for a solution that has a simple dashboard that allows you to access everything from the GL to reports with a few clicks of the mouse.
• In many industries, billing takes place at the time of sale or on a fixed monthly schedule — think of buying office supplies or subscribing to a streaming service.
• If one chooses to keep hard copies of these, a safe and organized place to put them would be in a filing cabinet.