How Is Construction Accounting Different?
Updated: Sep 7, 2022
It can be said that accounting is a necessary part of every business to ensure the financial matters of the company. However, we need to know that construction accounting and regular accounting are two different types of accounting, even though both are based on Accounting Standards such as financial statements, balance sheet, ...
For typical businesses, today such as selling stores will apply regular accounting. This is because the business operations of these firms are fixed, and the costs of goods sold are relatively stable.
On the other hand, construction accounting is a type of project accounting in which costs are allocated to a specific contract. Construction accounting is designed specifically to help contractors keep track of each job and how it affects the company's business. Although construction accounting is based on the same basic principles as regular accounting, construction accounting also has important points and differences.
In this article, we will take a look at some of the most obvious differences between construction accounting and regular accounting.
1 / Project-based accounting
Business activities of construction businesses are based on the projects they have. Issues of payment, production, or labor are only viewed based on each project. The finances of a business are built on the performance of each project.
For conventional businesses like retailers, the stores they have are their main profits and they can control or forecast profits and costs.
For a construction company, the projects that the contractor has are their main profits/costs but all are short-term and unique. Even when projects have similar production requirements, they’re often subject to different site conditions or local variables like labor availability, cost of materials, and legislation. Plus, projects are continually opening and closing during the year with each contract.
For regular accounting, the cost of goods sold and expenses are both relatively clear numbers, but there is no similarity with construction accounting. In construction accounting, there are a lot of "overheads" that will be counted in the "cost of goods sold" section because they are directly linked to the client's project.
3. Decentralized Production
Activities of construction companies take place mainly based on different locations according to each project. That is why equipment and labor also move regularly from place to place. Because of that, construction accounting needs to focus on carefully managing each job.
In addition, construction is a less predictable business process and often does not have a large inventory because projects often have long and seasonal cycles. As a result, the cost and availability of production inputs can fluctuate and require special, careful tracking and planning.
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4. Long-Term Contracts
The long-term production cycle is an influencing issue in construction accounting.
If you are a clothing reseller, your contract is completed as soon as you hand over your product to the buyer.
But in construction, the contracts can last for many years, and payments can also last during that time. Typically, terms in a construction contract will allow 30 to 90 days for payment. Therefore, revenue and cash-in the construction both need different accounting than regular accounting. Contractors need precise tracking and reporting, as well as collection and cash-flow strategies.
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