Construction Accounting 101 – Guide for Small Business Owners
Updated: Oct 26, 2022
Accounting is one of the most important parts of business management and administration. In the construction industry, contractors face certain difficulties in accounting due to their unique challenges. In this article, we aim to full fill contractors with the basic knowledge of construction accounting and the key differences between construction accounting and regular accounting.
The unique challenges of construction accounting
Typical businesses such as grocery stores or restaurants use a typical accounting principle that involves a straightforward system of income and expenses. Businesses pay for bills and products and if there are profits at the end of the month, it means they are operating successfully. However, in the construction business, due to its mobility and customized work. Construction companies have different types of expenses such as travel time, job costing, or mobilization costs. It is important for contractors to keep track of their expenses to accurately project profit and loss. Also, projects can be run for a whole year, during which the expense could be outweighed by the income. In addition, the possibility of unexpected setbacks and changes in the contract can change the expected profit.
Construction Accounting vs Regular Accounting – Key Differences
Sales – The first difference is what construction companies sell. The regular business account usually offers 1-5 products and services categories. Construction account, on the other hand, offers a wider range of services categories such as consulting, and engineering. Labor, physical products, or materials.
Cost of goods sold – Regular businesses simply record the cost of the product sold but construction accounting is more complicated. The costs fall into hundreds of categories.
Expenses/Overhead – For regular accounting, there is a clear distinction between the Cost of goods and the Overhead. But it’s not simple in construction accounting. Many “Overhead” items in regular accounting fall into the “Cost of Goods Sold” category in construction accounting because they are directly connected to customers’ projects.
Break-Even – In regular accounting, it is fairly easy to calculate the breakeven point because the relationship between income and expenses is direct. Also, it is easy to determine which items are profitable and unprofitable in the reports and make suitable and timely adjustments. However, in construction accounting, there are too many categories to easily determine the break-even on a project. Moreover, there are customized jobs in the project that involve a variety of associated costs.