When owning a construction business, you have to deal with a lot of moving parts, from managing contracts and scheduling projects to basic business ownership responsibilities like hiring and filing taxes. For contractors (as well as all other business owners), accurate financial tracking and reporting is essential to the success of your business. Whether you are new to owning a construction business or are finding flaws in your current accounting system, understanding the basics of accounting for construction can help you structure your finances in a way that helps you minimize your business’s financial challenges. That’s why it’s so important that you and your team not only understand accounting best practices but have specialized knowledge of the construction industry too. The success of your business and satisfaction of your clients depends on knowing construction accounting basics, but if you do not have a financial background, it can feel like an uphill battle. Here are the construction accounting basics all contractors should know.

When setting up accounting for your contractor accounting system, there are certain factors you will need to pay special attention to base on the unique needs of your construction business:

• How to account for revenue and expenses.
• How to categorize costs for projects.
• Which accounting system you need to use.
• Whether you should use software or hire professional accounting help.
• How to improve your tax strategy so you can lower your tax burden.

General Accounting vs. Construction Accounting

It might seem like accounting is generally applied to all businesses the same way, however, each industry has distinct needs, including construction contractors. While many industries can apply general accounting to their business model, there are several adjustments necessary when it comes to accounting for construction.

One of the most influential factors that separates construction accounting from general accounting is the fact that income and revenue are tracked on a project basis. Because of this, there is a lot of variability when it comes to both costs and income. For itself, accounting for construction relies on the careful tracking of the expenses and profits of each project. For more information, please use the link below.

https://www.fasteasyaccounting.com/construction-accounting-vs-regular-accounting

Due to the highly customized work done by contractors, basic accounting principles must be re-evaluated and implemented in the correct way; these include:

• Sales: The diversity and long list of services that many contractors offer can make it especially complicated to track sales.
• Cost of Goods Sold: Instead of simply having a few categories that costs need to be assigned to, costs of goods sold for contractors include both direct and indirect costs, not to mention an exponential number of categories and subcategories.
• Overhead: Construction companies have a more difficult time classifying costs as overhead vs. cost of goods sold. This is because expenses that are connected directly to a project should be accounted for as cost of goods sold. A good example of this is accounting for the materials used on the job. Because they are attributed to the cost of goods sold, it often leads to underbidding on a project.
• Break Even: In general accounting, the break-even point is found by dividing fixed costs by gross profit margin. However, in accounting for construction, the process of finding the break-even point is much more complex.
• Job Costing: This is a tool used by contractors for accounting for construction because it allows them to break down the costs of each project and improve how they are bidding on projects to help ensure more consistent profitability.

Contractor Accounting Methods

Because of the nature of construction contracts, it can be difficult to know how to account for deposits and the eventual payments that you will receive once you complete the work you’re performing for a client.

1. Cash-Basis Accounting Method: In this method transactions are recorded when you pay for an expense and when you receive a payment for the service you have provided.  
2. Accrual-Basis Accounting Method: Transactions are recorded at the time it is earned (when it is billed for).
3. Percentage of Completion Method: The percentage of completion method is a means of tracking revenue and expenses on a project and goes hand-in-hand with the cost-basis accounting method.
4. Completed Contract Method:  The completed contract method is a popular method of accounting for exempt construction contracts. Revenue and costs on contracts are not recognized until the contract is completed—or over 95% complete—and can be used for its intended purpose. For more detail you can use link below: -

https://www.nysscpa.org/news/publications/the-trusted-professional/article/accounting-methods-for-construction-contracts#:~:text=Accounting%20Methods%20for%20Construction%20Contracts%201%20Completed%20contract,with%20the%20opportunity%20to%20elect%20the%2010%25%20method.

The choice of accounting method can have an important impact on tax-related disbursements. Effective tax planning relies heavily on the concept of deferring the payment of tax. Construction contractors and their advisors need to consider the optimal method under their specific circumstances provide the greatest benefit.  

HTH & Associates help organizations and business owners with accounting and/or financial consulting services.

If you have questions about the accounting method you should be using for your construction firm, contact us at accounting@thaddeus.org  or call us at 909-599-2111.

Thanks for reading and good bye for now until we meet again.

Sapna Agnihotri

Sapna Agnihotri, an Accounting and Human Resources Intern at Thaddeus Resource Center. Prior to Joining Thaddeus Resource Center, she worked as a teacher. A graduate in Family Finance and Consumer Science, she studied Accounting from Waukesha Technical College, and lives in Wisconsin.

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