Accounting is a vital part of any business, and construction firms are no exception. However, even if standard accounting principles are the same, construction accounting is still a specialised field in itself, as construction firms operate in a slightly different way than other companies.
In this guide, we’ll break down the essentials of construction accounting to help you make smooth financial management for your construction company and keep your projects profitable.
What is construction accounting?
Construction accounting is a specialised form of accounting designed for contractors and construction companies. It’s not just about recording income and expenses. Rather, it addresses unique aspects related to construction operations like long-term timelines, complex costing structures, and labour, materials, equipment, subcontractors, and overheads.
Unlike traditional accounting, construction accounting uses cost codes to organise expenses by job, making it easier to monitor profitability. It also involves unique processes such as progress billing (billing clients as a project progresses), retainage (withholding a percentage until completion), and complex financial reporting.
Difference Between Traditional Accounting and Construction Accounting
Traditional accounting is designed for businesses with steady income and predictable expenses, such as retail or services. It focuses on tracking overall company finances without digging into the specifics of individual projects.
Construction accounting, on the other hand, deals with custom projects. Project-based accounting focuses on transactions that are specific to that project.
Moreover, it has to look after multiple projects occurring on different sites. This means construction accountants have to consider travel and equipment reinstallation costs as workers and equipment constantly shift between projects.
Key Principles of Construction Accounting
Job Costing
Job costing is a crucial part of construction accounting. It includes monitoring the expenses of a specific project. This involves labour wages and materials, transportation, and renting equipment. Job costing in construction allows contractors to easily see which projects are profitable and which are overspending.
Revenue Recognition
Construction projects often run for months or even years, making revenue recognition quite a challenge. To make it streamlined, accountants generally use two key methods:
- Completed-Contract Method: In this method, revenue is calculated only when the entire project is finished.
- Percentage-of-Completion Method: In this method, revenue is recorded as work progresses, based on milestones achieved.
Work-in-Progress (WIP) Reporting
WIP reports give contractors a sneak peek of ongoing projects. They showcase how much work has been finished and how much has been billed. This helps companies identify overbilling or underbilling problems. Such a proactive reporting approach ensures better forecasting and profit management.
Streamline Your Construction Accounting Processes with Stellarwiz
Mastering construction accounting can be overwhelming, especially when managing multiple projects. This is where Stellarwiz comes into play.
With our expert accounting services, we can help you streamline every process so that you can focus more on your core business activities. Our tailored solutions save you time, reduce costly errors, and give you real-time insights into your business’s performance.
Ready to take the stress out of construction accounting? Partner with Stellarwiz today and streamline your financial management for your construction company.
