Top-notch construction accounting practices are just as important to a successful construction business as materials, labor, and equipment. Unfortunately, many construction companies, especially smaller ones, struggle to get a clear picture of their revenues, expenses, and profits.
This guide provides a comprehensive overview of construction accounting, covering key concepts and strategies that can help you streamline your financial processes and make informed decisions.
Want to learn how construction companies can automate their financial operations? Check out our complete financial automation for construction guide.
What is construction accounting?
Construction accounting is a specialized branch of accounting that focuses on financial management and reporting for construction projects. Like other forms of accounting, it includes tracking and analyzing costs, managing budgets, monitoring cash flow, and ensuring compliance with industry regulations. At its best, construction accounting provides valuable insights for decision-making and fuels healthy financial growth.
Construction accounting vs regular accounting: What’s the difference?
Regular accounting encompasses the general financial management tasks and reporting that are required by any business. Construction accounting builds on that foundation, adding specialized practices to address the unique nature of construction projects. It's more focused than regular accounting and requires more technical knowledge.
Construction accounting tracks the costs related to materials, labor, and equipment, as well as managing project budgets and cash flow. It also involves identifying payment terms in construction contracts, complying with industry regulations, and managing project-specific financial risks.
The following section digs into these areas in more depth, highlighting some of the unique challenges that construction accountants may face.
Construction accounting vs financial accounting
From accurate job costing and job pricing to complex accounting methods, construction company accountants face several unique challenges. Let's take a closer look at some of these construction accounting issues.
Top construction accounting issues
Job costing: All companies need to anticipate future expenses, but job costing in the construction industry poses some unusual difficulties. Over the course of a multi-year contract, even the cost of materials can change significantly between the time work begins and the day it's completed. Job costs can also be affected by changes in regulations, unusually inclement weather, pre-existing contamination discovered at a dig site, and other unforeseen events.
Job pricing: The approach to job pricing is simple enough—determine your expected costs and then add a certain percentage to account for risk and profit. But that's easier said than done in the construction business. Add too much for risk, and you could easily be outbid on contracts. Add too little, and the company could end up in the red. Insurance can help mitigate some of these risks, but making sure policies meet both financial and regulatory requirements can be a challenge in itself.
Managing job site budgets: Once a contract is in place, it's vital to oversee job site budgets to make sure a wide range of actual costs meet expected costs on each individual project and construction job. These include material costs, equipment costs, labor costs (including hours and rates), and more. Keeping accurate records is critical for construction firms, especially given the complexities of construction accrual methods like the percentage of completion method.
Long-term contracts: Contracts that span multiple accounting periods are common in the construction industry. In fact, many construction contracts take years to complete, and expenses often hit a company's cash flow long before payment comes in the door. This creates challenges in overseeing cash flow, managing credit, and matching revenue with expenses to generate meaningful income statements.
Progress billing: Many construction contracts build progress billing into their long-term contracts to help lower their risk and even out their cash flow. Payments are due at certain milestones along the way, but expenses may already be accumulating toward later milestones. When this is happening across multiple job sites, matching expenses to revenue can be especially tough.
Subcontractor payments: Before a subcontractor's invoice can be paid, the contractor's accounting team needs to verify that the amount is justified. This means checking each invoice against its underlying contract, identifying the correct job site, and verifying with the project manager (often by remote communication) that the invoiced work has been completed, inspected, and approved.
Unforeseen circumstances: Change orders, permitting problems, environmental protection issues, and even bad weather can wreak havoc on job costing, timelines, and construction budgets. Construction accountants often need to revise budget projections mid-project to help corporate leadership navigate costly setbacks.
Standards and regulations: Due to the long timelines and considerable risks of construction projects, construction accountants need to adhere to specific standards and regulations that affect their accounting methods and tax reporting. This also affects the particular accounting methods that construction firms are required to use.
8 construction accounting best practices
1. Use specialized accounting tools
Construction accounting involves complex processes, such as job costing, progress billing, and contract management. To streamline these tasks and help ensure accuracy, invest in construction accounting software and financial automation tools that are designed for the industry.
2. Implement a cost-coding system
A cost-coding system is essential for tracking construction project expenses such as labor, materials, subcontractors, and equipment. Assigning unique codes to each cost category can provide more visibility into your cost structure and help you generate accurate financial statements.
3. Reconcile accounts regularly
Compare your account records with bank statements regularly to ensure accuracy and identify any discrepancies. Regular reconciliation can help you catch errors, prevent fraud, and maintain the integrity of your records and financial statements.
4. Track construction project costs in real time
Construction expenses need to be monitored closely to keep your projects on budget. Implement a system to track and manage costs in real time, including labor, materials, equipment rentals, and subcontractor expenses.
5. Prepare accurate and timely progress billings
Progress billing is a common practice in the construction industry—structuring payments based on the completion of specific project milestones. Implement systems that help you stay on top of the progress of each job. This will ensure that progress billings are prepared accurately and submitted on time to maintain a steady cash flow.
6. Maintain detailed records and documentation
Construction projects involve a large number of documents, including contracts, change orders, invoices, and receipts. Be sure to maintain detailed records and documentation that can support your financial transactions and provide evidence in case of disputes or audits.
7. Review financial reports
Regularly review financial records and reports, such as profit and loss statements, balance sheets, and cash flow statements. This can help you identify cost trends, assess project profitability, and make informed choices to optimize your construction operations.
8. Stay up to date on industry accounting standards and regulations
Construction accounting practices and regulations tend to evolve over time. Stay updated on industry changes by attending seminars, joining professional associations, and subscribing to industry publications. This will help you make sure you're always following the latest best practices and complying with regulatory requirements.
Manage construction contractor billing and payments with BILL
Given the complexities of construction accounting, these financial teams need as much control and visibility as they can get in their financial operations. That's why so many of them turn to BILL.
BILL's financial automation platform helps accounting teams streamline their AP, AR, spend, and expense processes, giving them more control over cash flows and more visibility in their financial reporting.
By automating your financial operations, you can:
- Maximize control over job site budgets
- Relieve the stress of expense reporting
- Speed up your monthly close
All of which makes your construction accounting a lot easier.
What does a construction accountant do?
A construction accountant does what other accountants do, applying generally accepted accounting principles (GAAP) to construction businesses. They simply face unique challenges, standards, and regulations. They allocate direct and indirect costs, invoice customers, apply overhead costs, manage job costing and pricing, prepare expense reports, handle payroll management, and much more, helping construction business owners make complex financial decisions. They also prepare important financial statements such as annual revenue reports, profit and loss statements, and so on.
How to account for construction
Whether your company uses a cash method or accrual method of accounting, understanding your actual costs begins with accurate accounting, excellent document management, and a solid grasp of basic accounting principles, such as revenue recognition. To account for numerous complex projects across scattered job sites, cloud-based software for both accounting and financial automation are highly recommended.
What are the different construction accounting methods?
There are many construction accounting methods representing different contract revenue recognition methods. The right method of accounting for a given company depends on the size of the company and the length of its contracts—they can't all be used by every construction firm for every job.
- The cash method, or cash-basis accounting method
- The completed-contract method
- The percentage-of-completion method
- The ASC 606 standards method
Is construction accounting hard?
Construction accountants need to maintain accurate bookkeeping for multiple business expense categories across multiple job sites and often multiple bank accounts. They also need a basic understanding of construction project management and the ability to communicate easily with construction managers about project progress.
These accountants need solid skills in both mathematics and communication, as well as excellent time management skills.