Construction Accounting 101 – Understanding the FundamentalsJanuary 15, 2024
Construction accounting is a world apart from general small business accounting. The long project life cycles, intricate tax implications, and specialized reporting requirements make construction financial management exceptionally challenging. For construction firms to properly track finances and remain profitable, they must have a solid grasp of some fundamental accounting principles.
Here is a quick primer on key construction accounting basics:
Job Cost Accounting – Tracking all costs on a job down to the tiniest expense, allocated correctly to specific projects. This allows detailed profitability analysis upon job completion.
Percentage of Completion – Revenue and profit are calculated based on the completed portion of projects rather than waiting until a job is 100% complete. This matches revenue to project progress.
Retainage – A portion of the agreed upon payment for a project is withheld until the end to ensure the contractor completes the work. Managing retainage is vital for cash flow.
Work In Progress – Construction projects take time, so WIP accounting is used to determine profitability on jobs still in progress at accounting period end.
Change Orders – Billings for alterations or changes to the original project scope must be approved and documented. Change order accounting impacts revenue recognition and job costing.
Compliance – From state lien laws to workers’ compensation to bonding requirements, construction accounting must adhere to various federal, state, local, and industry regulations.
Understanding these basic accounting concepts is foundational for construction firms looking to manage their finances effectively. Proper accounting helps contractors complete projects profitability while sustaining long-term financial health and growth.