Construction Accounting: The Basics

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what do accounting services for construction business cost

While there are some general accounting principles involved, there are several notable differences. 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.

  • In the construction business, most projects are outlined in contracts, since no two projects are the same.
  • Even when projects are similar in the work provided, each will have its own budget, materials, and local requirements.
  • Construction accounting includes unique concepts that reflect the specialized practices and requirements of the building industry.
  • The basic principles of construction accounting include tracking job costs and revenue recognition.
  • Your financial situation is unique and the products and services we review may not be right for your circumstances.
  • The practice of job costing helps businesses estimate and analyze costs and revenue for each project, keeping projects on track and profitable.

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. According to revenue standards, the contractor doesn’t have a current, unconditional right to the retainage portion of an invoice. 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.

Percentage of Completion

Though construction accounting shares the same basic principles as accounting in most other industries, it involves a number of industry-specific concepts and challenges. For example, construction firms typically aim to ensure that each project is profitable, which makes accurate job costing vital. And, projects are often large and one-off, so leaders must get the numbers right the first time. This is particularly challenging because a company’s projects are typically distributed across multiple sites, use a mobile workforce and are subject to fluctuating costs. In general, a construction business with gross receipts over $10 million must use the percentage of completion revenue recognition method for tax purposes. A construction business with gross receipts under $10 million can use the completed contract method on construction projects that last less than two years.

Which cost accounting method is used for construction work?

Construction job costing is a detailed accounting method used to calculate track and assign expenses to specific projects and monitor budgets. Costs typically fall into one of three categories: labor, materials and overhead. Costs can be either direct or indirect. Construction job costing is inherently complex.

Our bookkeeping for construction covers everything from accounting software to invoicing and everything in between. Construction companies can use a completed contract method to declare income; however, the approach is not compliant with generally accepted accounting practices. The CCM approach does allow companies to defer revenue recognition to a different accounting period which can reduce tax liabilities for the current period. We have a rigorous construction industry focus that has enabled us to obtain a significant depth of knowledge and experience that you will be hard-pressed to find elsewhere.

Best for Project Drawing Integration

Under cash accounting, if money didn’t change hands yet, there’s no transaction to account for. In construction, production contracts can last years and have multiple, extended payments over that time. Contract terms commonly allow 30, 60, even 90 days or more to pay invoices. As a result, revenue recognition and cash management in construction both carry special considerations. Contractors need precise tracking and reporting, as well as collection and cash-flow strategies.

Costs must be charged to the correct contract and categorized as direct costs, indirect costs, or selling costs. Starts @ $12 /hour Read moreFlatworld Solutions is a leading construction accounting service provider and can help you address a wide range of construction accounting requirements. We understand that construction accounting requires specialist skillsets due to the construction industry having its sophisticated accounting issues, audit procedures, and tax issues. We provide advanced construction accounting services that help you maintain your construction accounting processes at high-quality levels. In most cases, commercial contractors should use the percentage-of-completion method.


This reduces your tax burden at the end of the project and protects you from the risk of tax fluctuations. On the other hand, if you prefer to defer your taxes, the next method may be a better option for you. In a construction business, tracking labour costs is an essential parameter of budget estimation. A dedicated accountant will help track labour costs, submit bids, and analyse contracts before signing. The accountant also helps depict whether you can hire more staff on a dedicated budget.

What is the accounting standard for construction?

Accounting Standard 7 (AS 7) relates with accounting of construction contracts. The very purpose of this accounting standard is to specify the accounting treatment of revenue and costs associated with construction contracts.

This software platform is best for contractors seeking detailed bids from subcontractors and vendors to have the most comprehensive preproject data. 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.

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