All accounting uses the same accounting equation: liabilities plus equity-equal assets. Assets are what you own, liabilities are what you owe, and equity is what is leftover. While accounting is vital for any business, in the construction industry, firms and contractors face unique challenges when it comes to accounting. Whether you are constructing a foundation for a residential building or keeping the books, it is important to be aware of the differences between construction accounting and regular accounting.
Fixed vs. Mobile Environments
Roughly 80 percent of all accounting for businesses in the world is regular accounting. Its main function: provide basic financial reports for annual tax returns along with rudimentary management decisions. Regular accounting is used in fixed environments. In essence, customers come to the place of business, or at the very least, the company ships and delivers a packaged product.
In contrast, construction accounting makes up approximately 15 percent of all accounting, with manufacturing accounting making up the last 5 percent. Because it is less common, very little attention is given to construction accounting in schools, colleges, and universities. Since construction accounting is used in a mobile environment, it is important to track costs contractors incur related to custom work, including travel time, mobilization before starting the work (packing tools, equipment, labor and material at the warehouse then delivering to the job site and unpacking it), and then demobilization once the job is finished (reversing the entire process).
As a mobile environment, the entire place of business is packed up and taken to the customer. Essentially, construction companies are selling, assembling, delivering, and installing a customized product from a mobile shop on location, such as shooting a movie on location, just without all the glamour, resources, and money that go with it.
Simple vs. Complex
While construction accounting is more complex, its foundation is built upon regular accounting as they share the same basic financial reports for operating and growing a business. The many complex layers of construction accounting include reporting mechanisms to show contractors the psychographic and geographic market segmentation boundaries of their ideal customers. These reports include:
- Accounts Receivable
- Accounts Payable
- Profit and Loss
- Balance Sheet
- Cash Balance
- Job Costing Reports
- Job Profitability Reports
- Earned Value Reports
- Work-in-Process Reports
- Estimates vs. Actuals Reports
- Payment Applications
- and more…
It is valuable for contractors to use some of these reports to not only operate but also grow their construction companies. With the right reports, contractors can select the jobs worth pursuing and let the others go.
Other Key Differences
Sales: Unlike regular accounting, construction accounting presents a broader range of service categories like consulting, engineering, labor, design, physical products and materials, and many more.
Cost of Goods: While regular accounting requires that the cost of the product sold be reported, construction accounting is not so simple. Each job incurs both direct and indirect job costs that fall into a variety of categories.
Expenses and Overhead: The distinction between “cost of goods sold” and “overhead” is transparent with regular accounting; however, this is not the case in construction. Many items that other companies would consider “overhead” would actually be deemed “cost of goods sold” in construction since they are directly tied to the client’s project.
Break-even Point: For most businesses, the direct relationship between income and expenses makes calculating break-even points fairly simple. In construction, though, there are far too many categories of items, making it challenging to understand just how to break even on a project. And since most projects are one-of-a-kind custom jobs, there are intricate requirements and a variety of associated costs.
How Can Accounting for Construction help?
Construction accounting 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. 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. Ensure that your company is benefiting from its accounting method by contacting us online or calling at 918-984-9262 today.