Accounting for construction companies can be a complex task. Construction accounting must follow all GAAP rules (or Generally Accepted Accounting Principles). But, unlike other industries, construction accounting must also indicate profits, losses, and expenditures for each project, whether those projects are completed or still a work in progress, and how each project affects the overall bottom line.
Not sure how to get your construction accounting in line for your next audit? Here are some basics of accounting for construction companies that you need to understand to be prepared.
Accounting for Construction Companies Explained
There are a few essentials in accounting for construction companies that you need to be aware of.
Cost Types
Before you begin any project, you will likely prepare an estimate. Estimates are useful because they help keep you on track with your expenses. Along with estimates, you will also want to keep track of other cost types, such as:
- Job cost: What is the project’s actual cost compared to the estimate?
- Work in progress: Is the project active or under contract? WIP problems can get complicated for any audit. Keep this information organized in a WIP schedule to avoid errors.
- Costs of goods sold: Consider the price of the job’s materials. You will want to keep an updated list for each project to be prepared for the inventory valuation of your financial statement audit.
Contracts and Billing
How you bill and write contracts will affect your construction accounting and financial practices. Contracts should provide a clear scope of the project, payment timeline, and any other relevant details. You will also want to detail any terms of termination and/or retention. A few types of billing to consider are:
- Fixed Fee Contract: This type of contract means you are paid a flat rate for the work completed, regardless of extra costs you might incur while completing the task.
- Cost Plus Contract: A client will be billed for labor, materials, overhead, and a markup percentage. This markup percentage covers any future expenses that might happen during the project.
- Time and Materials Contract: Use this type of contract if you wish to bill your customer for the hours you have worked and the costs of materials.
- Unit Price Contract: This type of contract is unique because a contractor might use it to subdivide project tasks. For example, each square foot of a driveway may be billed as separate units.
Keep records of all your contracts and billing. This includes any correspondence, such as emails or letters.
Revenue Recognition in Accounting for Construction Companies
However you decide to recognize revenue, you need to make sure you correctly indicate your methods in your accounting system. There are two standard methods for accounting for revenue:
- Cash Method: Revenue is reported in your accounting system only when cash changes hands. This method is a good indicator of cash flow.
- Accrual Method: This method accounts for incurred expenses and when a customer is billed, even if you have not yet received payment.
Your accounting system should also indicate how you will be paid. You may be paid when you complete a percentage of the project or in a lump sum at the end.
- Percentage Completed: If you are working on a large project, it is reasonable to expect payment at set increments throughout the project’s timeline. You may ask for half of the project’s cost when 50% of the work is completed.
- Completed Contract: Payment will be recognized when the project is 100% complete.
Retainage
It is essential to account for retainage in your construction accounting practices. Retainage simply means a customer may withhold a certain percentage of the project’s cost until the project is finished.
Payroll
Reporting payroll is an integral part of your business. If you work with a team of employees, you need to track how and when your employees are paid, along with any other types of benefits, taxes, or union fees. Keeping these records up to date will not only keep your employees happy but also help you in the future when it is time to complete an audit.
Prepare For Your Audit
Unlike accounting in other fields, accounting for contractors and construction companies means looking at several moving parts, including individual projects and how those projects affect the overall bottom line for your business. Keep your accounting records up to date so your future audit goes smoothly and there are no financial surprises.
At Assurance Dominance, we are prepared to help make your future audit a success. As a construction CPA firm with over seventy-five years of combined accounting experience, we are here to ensure your audit is accurate and reliable. Contact us today to learn about the audit and assurance services we can provide for your construction business.
