Construction Company Accounting Procedures What You Need to Know

Contractors usually have to certify that they comply by submitting forms to the appropriate agency. Meeting prevailing wage requirements can be complex because rates change frequently and vary between jurisdictions. In addition, contractors have to navigate a complex web of labor laws and local tax regimes. Because construction accounting involves specialized concepts, it typically requires specialized accounting skills.

Are you struggling with high employee turnover in your construction company? Explore practical tips and strategies to reduce churn and overcome the construction labor shortage. As the leading provider of construction budgeting software, Buildertrend is committed to helping you stay on top of your bottom line. Buildertrend’s financial tools offer intuitive solutions and integrations – like our QuickBooks integration – to help you work simpler, especially when working with complex accounting rules. Even without an onsite consultant, gone are the days when construction contractors had to do everything all by themselves . Performance obligations are distinct deliverables within a contract that provide benefit to the customer.

How is construction bookkeeping different?

The Percentage of Completion Method that are used to recognize revenues, expenses, and taxes over the life of the construction contract based on its completion percentage. For example, if the contract is 50% complete then the contractor will recognize half of the revenues, costs, and income. In addition, under cash-basis accounting, a business doesn’t have to pay taxes on cash it hasn’t been collected.

• Sure, it doesn’t exactly get the blood racing – but if you’re the owner of a building firm, your business depends on getting it right.
• See a cash flow statement summarizing transactions within a specific period for insights and informed decision-making.
• It’s essential that contractors have an effective method for keeping track of income and expenses, and for reconciling every transaction.
• Any platform you choose needs to integrate easily with your existing systems, including your ERP and any other tools used to manage payroll, financial accounting, forecasting and others.

These concepts span the entire project lifecycle, from estimating to billing and revenue recognition. The billing method agreed on with clients may vary based on the type of project and the risks involved. Construction firms — especially those undertaking large-scale projects like commercial or municipal buildings — may win only a few contracts per year. Thus, a typical chart of accounts for a contractor will look different from a manufacturer or high-volume retail or hospitality business. Sales staff will also be remunerated differently, and accounting needs to pay significant attention to the financial health of customers.

Construction Bookkeeping Tips

Retainage amounts are often substantial, amounting to 5% to 10% of the contract value. This emphasizes the fact that accurately accounting for all costs is key to determining whether projects make a profit, break even or lose money. Make sure to invoice clients regularly or ask for payment upfront for expensive materials and labour. The critical thing to know about construction accounting is that you have to do it regularly. One of the easiest but most important steps to follow is maintaining daily records.

This lets them track transactions that impact the whole company’s financial picture. However, because construction accounting is project-centered and production is de-centralized, contractors also need a way to track and report transactions specific to each job. Job costing is the practice in construction accounting of tracking costs to particular projects and production activities. 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. They’re only required to use the percentage of completion method for construction contracts that extend over two years.

Make accounting part of your workflow

These payments are subject to the builder meeting certain obligations, at which point the payment received would be recognized as revenue in each installment. Retainage occurs in construction when a portion of a payment construction bookkeeping is held back – or retained – from a payment until the project is complete. Revenue recognition is defined by when a construction contractor is paid versus when they can record the revenue of that payment on their books.

You may also decide you want to pay a quarterly estimated tax, which can result in a lower overall tax burden. Doing so requires an organized tax system, however, and you must stay aware of four tax deadlines throughout the year instead of just one. Construction work is fast-paced and requires you to manage multiple operations at once. Proper bookkeeping is a skill and professionals work for years to learn the right methods and strategies for efficient record-keeping that satisfies all the necessary legal and financial requirements. That being said, you can perform the services you need by staying organized and researching some tried and tested methods. If you plan on doing your bookkeeping yourself, here are some of the best bookkeeping construction tips to familiarize yourself with.

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By using expert knowledge, your team can ensure accounting practices are compliant, understandable and easy to stick to based on the resources and accounting staff your construction company has available. However, if a 5% retainage was negotiated into the contract, the construction company would only receive 10 payments of $33,250. After the entire project is completed, then the home buyer would be on the hook for paying the retainage balance of $17,500. Then the construction company would be able to recognize the remaining balance as revenue.

Understanding each type of construction accounting — as well as the advantages and disadvantages of each — can help a construction business choose the right method for its situation. You’ll generally be working with multiple subcontractors, in various places, on different projects, each with their own terms and payment dates. No matter how far you are in the weeds, our team is here to help with your bookkeeping catchup that will have your financial records in order in no time.

IAS 11 — Criteria for combining and segmenting contracts

In addition to these basic reports, reporting could include other documents to help support your compliance. These can vary to include things like union reports and workers compensation, to contract reporting supporting ASC 606 . That means the resources used to support each project, including everything from equipment used to the construction workers tasked with working the sites, are constantly on the move. If equipment isn’t shared between sites, the company must lease or purchase even more resources to outfit each location. Learn how to use your construction software to properly measure revenue and stay ahead of the curve.

• Due to the project-based nature of contracting, job costing is at the core of construction accounting.
• Learn how to use your construction software to properly measure revenue and stay ahead of the curve.
• This lets them track transactions that impact the whole company’s financial picture.
• The billing method agreed on with clients may vary based on the type of project and the risks involved.