Updated: Aug 3, 2020
Accounting is one of the most important parts in business management and administration. In construction industry, contractors face certain difficulties in accounting due to theirs 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 store or restaurant use typical accounting principle which involves a straightforward system of income and expenses. Business pay for bills and products and if there are profits at the end of the month, it means they are operating successfully. However, in construction business, due to its mobility and customized works. Construction companies have different types of expense such as travel time, job costing or mobilization costs. It is important for contractors to keep tracking of their expenses to accurately project profit and loss. Also, projects can be run for a whole years, during which the expense could be outweighed 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. Regular business account usually offer 1-5 products and services categories. Construction account, on the other hand, offers a wider range of services categories such as consulting, 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 Cost of goods and Overhead. But it’s not simple in construction accounting. Many “Overhead” items in regular accounting fall into “Cost of Goods Sold” category in construction accounting because they are directly connected to customer’s projects.
Break Even – In regular accounting, it is fairly easy to calculate the breakeven point because the relationship between income and expenses are 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 break even on a project. Moreover, there are customized jobs in the project that involve variety of associated costs.
Reports recommended for successful contractors:
1. Accounts Receivable
2. Accounts Payable
3. Profit & Loss
4. Balance Sheet
5. Cash Balance
6. Job Costing Reports
7. Job Profitability Reports
8. Earned Value Reports
9. Work-In-Process Reports
10. Estimates Vs. Actuals Reports
11. Payment Applications
12. And more...
What should contractor do?
Construction accounting needs to start with understanding about the different types of costs in the project. The accounting process require carefulness. Contractors can apply construction software solutions to help. However, it is recommended that contractors should hire a professional accountant or bookkeeper to save your time and potential money. Construction Cost Accounting with experienced and delicate accountants and bookkeepers can save your from accounting headache. In Construction Cost Accounting, we provides full construction accounting services for contractor. Contact us now!
If you need any advice or services on any aspects of construction bookkeeping, accounting or tax, our construction accounting specialists are ready to help. Get in touch with us for free quote.