Accounting for construction companies follows the same basic accounting rules and all GAAP (Generally Accepted Accounting Principles). However, construction has such a one-of-a-kind architecture (pun intended!) that the industry requires additional accounting arrangements.
Think of all of business accounting as a giant tree trunk. Construction accounting is a specialized branch extending out from the trunk. And while the branch looks and behaves like many other branches on the tree, it is unique. It is specially suited to fit the needs of construction businesses.
Why You Should Care
Finding a knowledgeable construction accountant should be at the top of your priority list if you are a contractor or run a construction company. That’s because the right kind of accounting:
- Improves your budgets and estimates.
- Wins you more bids.
- Lowers your expenses.
- Enhances your overall decision-making.
What Makes Construction So Different?
Construction contracting isn’t like an average business. It has distinct accounting features due to some pretty unique workflow structures. The major characteristics setting construction apart from the average company are:
- Project-based jobs
- Numerous service categories
- Decentralized production
- Lengthy transactions
Let’s look at each characteristic to better understand how accounting specific to the construction industry is integral to a construction company’s success.
1. Project-based Jobs
Unlike most businesses, construction jobs are based on individual projects. Each job will eventually end, unlike that of, say, a restaurant owner whose job is ongoing. In construction, each project serves as its own little business, in a way, with a distinct beginning and end.
Each project varies in materials needed, workers available, site conditions, and regulations for the final products. For example, a contractor can build a bathroom for homeowners in one city and be subject to that city’s permit requirements, the neighborhood’s HOA regulations, and the labor market. In another town, he might install flooring in a downtown cafe and have different local and business permits and a labor market to deal with.
Contractors must track types and totals of expenses for each job (called “job costing”) to understand where they stand with inventory, money, payroll, and project status.
2. Numerous Service Categories
With so many direct and indirect job costs, like labor, materials, design, and consulting services, contract accounting must adequately record and report in each category. Accurate tracking of expenses is essential to control costs and bid competitively in the industry.
What many businesses would record as overhead costs, contractors can turn into the cost of goods sold (COGS). For instance, the gas used to get to and from job sites can be recouped in the COGS for a contractor. Contrast that to the restaurateur who pays for the gas used to pick up restaurant supplies from their supplier and considers it an overhead cost.
3. Decentralized Production
Construction isn’t stationary; it’s on the go. There’s no central warehouse or storefront. Construction jobs move around. Along with that mobilization, contractors incur a variety of costs, supplies and suppliers, labor markets, hours, and wages.
Additionally, construction work is highly seasonal. Particularly cold or wet seasons can make for long, unpredictable production cycles. With that uncertainty, contractors don’t want to stockpile inventory. Supplies are purchased as needed. As a result, products and costs fluctuate, making planning challenging.
4. Lengthy Transactions
Construction projects take time and are typically expensive. As a result, production contracts can last years. Additionally, payment terms can be extended past 30 days to 60 days, 90 days, or longer.
With their complexity and expenses, many construction projects come with a satisfaction guarantee to the owner. This guarantee may mean that final payment is due only when the owner is satisfied with the work. Retainage withholding (no final payment until the owner approves) and disputes mean the contractor can’t count on closing the job and receiving full reimbursement upon completion.
Contractors can go a long time before being fully recouping payment on a job. As a result, revenue recognition and cash management must be recorded and reported differently than with the typical business.
Billing, Taxes, and So Much More
Contractors must choose from several ways to bill clients and report realized income on their taxes. Then, they must apply those choices consistently.
A specialized construction accountant can set up contractors for success with everything from billing and bookkeeping structures to job costing and payroll methods and the technology to make record-keeping easier. And not to mention labor union complexities.
A specialized construction accountant records and organizes job data, creating information contractors, project managers, and forepersons can use for better judgment calls and planning. Contractors can then educate project managers and superintendents on the successful control of expenses and production.
Construction companies can enhance their estimates on break-even costs and insights into crew performance, improving their chances at winning tight bids. Management can make project-specific or across-the-board adjustments to reform their processes and boost bottom lines. With better estimating, bidding, and cost control, contractors can make better business and bidding decisions while improving profit margins.