Accounting and financial management is a difficult task in all industries but even more so in construction. Varying lengths of contracts along with a large, transient workforce can make accounting in construction challenging. Unlike other businesses that can take a simple record of debits and credits, accountants in the construction industry use sophisticated accounting solutions to match income and expenses accurately. Though experts in the process of building a structure, construction company owners are not nearly as experienced with the nuisances of construction accounting, making it imperative for them to consider these three methodologies.
1. Make accounting a priority
Those who work in the construction industry know it is rarely a fixed structure. While contractors make up the bulk of the construction workforce, they may be juggling several projects at the same time, spending a few hours each day on each project. Because of this, they may even employ subcontractors to help out. Temporary workers may come and go, but even a formal payroll may change weekly. All of this effort and work leaves little time to focus on accounting. However, this is a mistake. Working hard only makes one tired, not rich. To make more money and understand your numbers and costs beyond debit and credit, you must make accounting a priority. It is critical that construction owners learn the ins and outs for themselves or hire a professional who is experienced with construction accounting.
2. Select the right accounting method
A typical retail transaction occurs when money transfers from the buyer to the seller. For example, when you buy a TV for $400, the revenue is recognized when received by the store from you. The product or service is then given. An exchange has been made; the transaction is complete. However, construction accounting, with all its parts, sub-parts, and project lengths, is more complicated. While the contractor and owner may agree on a contract, the owner does not pay the contractor at the start of the project. There are several steps that occur in between the agreement and the final product. Until the work is done, the transaction is not complete. Because of this, there are two preferred methods of construction accounting:
- Percentage of Completion Method is the most common due to the complexity and length of most construction projects. However, there are some parameters for using this method. An enforceable contract must be in place stating how funds will be paid and received, and the contractor must have reasonable assurance that they can collect what is owed. Additionally, as the job progresses, the contractor must be able to account for the percentage of job completion.
- Completed Contract Method requires that all income from a contract be reported and all expenses deducted in the same year the job is completed. Revenue is not recognized until the project is completed or near to it.
3. Be conscientious with record keeping
Although somewhat obvious, this is not always the standard. With so many project-related moving parts, some contractors place their trust in others to provide an accurate accounting of all those moving parts. Additionally, contractors know what it takes to build structures, not pore over ledgers. Unfortunately, failing to do so can put the job’s profitability at risk, cause disgruntled or litigious owners, and bring about issues with tax authorities.
How can Accounting for Construction help?
With knowledge from decades of experience, our financial professionals at Accounting for Construction are ready to help your company with the complexity of construction accounting. Accounting for construction requires a keen eye for detail, whether accurately tracking expenses or categorizing costs, and we know that there are unique challenges associated with the construction industry. Ensure that your company is benefiting from its accounting method by contacting us online or calling at 918-984-9262 today.