Construction Accounting 101: A Simple Guide for Contractors

Under regular business accounting circumstances, revenue recognition is simple because they sell a product or service and collect a fixed price right away. However, the nature of construction companies makes how these businesses recognize revenue more complicated. However, managing your business finances correctly doesn’t always come naturally—especially if you’re not much of a numbers person. What’s more, accounting for construction company finances has some unique challenges compared to other types of businesses.

• A balance sheet report is a comprehensive document detailing a company’s liabilities and assets.
• We can help you take the right approach to managing your successful construction business and ensure you’re generating enough revenue to cover all costs while still turning a profit.
• For one, there’s a large variety of financial transactions in the construction industry.
• Budgeting and forecasting are essential for construction companies because they often have large, complex projects that require significant resources.
• These projects can range from building residential properties to large-scale infrastructure developments.

Why is construction accounting so hard?

It is crucial to track these different expenses to be a successful construction company. Unlike industries with consistent day-to-day operations and predictable costs, construction companies grapple with a complex array of challenges. If you need help getting started or have outgrown handling your construction company’s books on your own, schedule a call with Slate. We can help you take the right approach to managing your successful construction business and ensure you’re generating enough revenue to cover all costs while still turning a profit. Because customers’ payments arrive at various times, unpredictable cash flows are expected. With accurate construction accounting, companies can better manage their liquidity and prepare for cash shortages.

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Progress Billing and Revenue Recognition

This method allows contractors to accurately report their financial position at any given point in time since all transactions are taken into account on an accrual basis. This accounting method is great for small construction businesses that don’t have a high volume of sales or complex transactions. Unfortunately, this becomes so commonplace that even once the business is established and successful, expenses https://digitaledge.org/the-role-of-construction-bookkeeping-in-improving-business-efficiency/ are still paid out of a personal bank account.

This specialized approach involves sophisticated methods, systems, and comprehensive reports that enable construction firms to gauge their financial well-being accurately. By adhering to construction accounting principles, companies can optimize financial performance and navigate the complexities of their diverse projects effectively. Construction accounting is unique, employing the percentage-of-completion method, which recognizes revenues and expenses based on the progress of construction projects. This approach provides a more accurate financial picture during the lifecycle of a project, allowing for better cash flow management and strategic planning.

• Retainage, or retention, is a percentage of the total contract value withheld by the client to ensure project completion.
• Unlike traditional accounting methods, accounting for construction focuses on project-based financial management, often dealing with long-term contracts and variable costs.
• Additionally, compliance with labor laws and union agreements adds another layer of difficulty.
• So they need to be able to track accurate costs, bid on jobs, manage prevailing wage requirements, and handle a slew of other accounting responsibilities.
• Job costing is a special feature of construction bookkeeping that some find useful.
• However, managing decentralized production requires robust coordination, communication, and planning to ensure seamless collaboration between teams.

Tracking these costs separately helps bookkeepers identify discrepancies early and maintain control over the budget. Regular audits should be conducted by an internal or external auditor to ensure that the financial records are accurate and complete. Auditors should review the financial records, policies, The Importance of Construction Bookkeeping For Streamlining Business Operations and procedures to identify any weaknesses in the system of internal controls. Just as you have project managers overseeing each job site, it might make sense to hire a professional accountant to help you reconcile a variety of transactions for various jobs and services. You’ll also want to categorize these expenses by service, and by individual job so you can easily track how much money came in as well as how much you spent on expenses. Using an expense tracker and saving your receipts can help you keep track of all of your expenses and project profits on each job.