How to Do Accounting for Your Construction Business 8 Steps

In construction accounting, the main options have traditionally included cash-basis, completed contract and percentage of completion. However, contractors now have to consider guidance from the new ASC 606 revenue recognition standards with their construction CPA. Construction accounting is a unique form of bookkeeping and financial management with many distinctive features, such as job costing and change orders. This can leave many contractors and construction companies struggling to find the right accounting methods to keep up with their different projects, decentralized work, and irregular costs. Thomas Huckabee, CPA, has worked with several types of construction companies in San Diego, and stays current with all the rapid fire changes that happen in construction accounting procedures. Our business advisory experience can help your business with controlling and estimating job costs, increasing cash flow, evaluating the profitability of projects or minimizing tax obligations.

• This approach allows the contractor to recognize revenue and profits at regular intervals over the term of a project.
• Construction accounting is a unique form of bookkeeping and financial management with many distinctive features, such as job costing and change orders.
• The 2022 Marcum Year-End Tax Guide provides an overview of many of the issues affecting tax strategy and planning for individuals and businesses in 2022 and 2023.
• Change orders represent both great opportunities and potential pitfalls for contractors.
• Once a contractor does have a right to it, after satisfactory contract completion, the contractor issues an invoice for it and moves it from the asset account to the A/R account for collection.

This is best for contractors who are constantly at job sites who want a simple mobile app to use to manage and capture data that integrates immediately with the platform. Project management is critical to meeting budgets on your construction sites. Jonas Premier provides you with a customizable dashboard that gives you the insights you need to manage every aspect of the job. Record electronic signatures for approvals and use the cloud-based document storage tool to keep everything you need one click away.

Contractor Balances Report

As a result, the financial statements of construction companies often include a paragraph describing the special treatment of retention. The percentage of completion method has numerous advantages for companies that are balancing several long-term projects. Most importantly, this method enables financial managers to get a clear view of the current financial status of each project as well as the financial horizon as each project progresses. The revenue recognition principle states that revenue should be recorded when it has been earned, not when the cash for a product or services is received. This differs from cash-basis accounting which recognizes revenue when cash is actually paid out and received. The revenue recognition principle is not applicable to cash-basis accounting.

” This will help you decide whether you need to allocate certain indirect costs to jobs so they are appropriately billed. Indirect costs may still be necessary to a project’s completion but are often overlooked when attributing costs to certain jobs. For example, a contractor might provide a unit price per mile of highway. To make a profit, a construction firm needs to be able to accurately estimate all the costs — labor, materials, overhead — involved in delivering each unit.

Calculating Cost of Goods Sold for Construction Contractors

The first method, percent complete, recognizes the revenue on a project based on the percentage of costs that have come in. Providing accurate job costing at every stage of a project is critical. Without this foundation, contractors will be hard-pressed to manage costs and remain afloat in today’s competitive marketplace. Many smaller construction firms use cash-based accounting methods, recording revenue when it is received and when expenses are paid. Many construction businesses use the accrual basis of accounting, which means they record revenues when earned and expenses when incurred. Cutoff errors occur when expenses are omitted from a period covered by a financial statement, which generally happens because invoices aren’t received until after the period is closed.

In practice, when a contractor earns revenue under an accrual method like CCM or PCM, they have the right to issue an invoice and record the amount as an account receivable (A/R) until it’s collected. Tied to the idea of long production cycles is the idea that construction contracts https://www.archyde.com/how-do-bookkeeping-and-accounting-services-affect-the-finances-of-real-estate-companies/ are longer than many other businesses deal in. If you’re a dealer, the contract is complete as soon as the transaction is. Even if you’re a truck manufacturer, it might be a longer term between the sale and delivery, or you may just deliver from a stock of inventory.

Common reports in construction accounting

Finally, contractors can face numerous payroll reporting requirements, even if they don’t have to file certified payroll. These can include union reports, workers’ compensation, new hire reporting and equal employment opportunity minority compliance. Contractors need to have a keen awareness of these requirements for each jurisdiction they bid and work in, from the federal down to the local level. As a result, contractors in multiple jurisdictions have to watch out for double taxation. Chiefly, this can be a problem where an employee resides in one state and works in another.

Works well for simple needs, but it lacks the sophistication to handle their growing and advanced project-based processes, transactions, and reporting. Construction is characterized by thin profit margins and a high degree of uncertainty. Accurate financial reporting is important not only to operating successfully, but also to looking good in real estate bookkeeping the eyes of sureties, lenders, and other stakeholders. Change orders represent both great opportunities and potential pitfalls for contractors. What’s more, the accounting rules for dealing with them are complex and can lead to errors. Are you susceptible to this problem because your month-end close process occurs shortly after month-end?