Construction accounting is a type of project accounting which involves some unique terms and requirements that differ from other businesses. A regular brick-and-mortar business stays in the same place to sell products or services, whereas a construction company is mobile and completes custom jobs on a regular basis. This requires various costs to be tracked including travel time, moving equipment and materials (getting to the job site and leaving the job site at the end of the project), and more.
To simply calculate how to break even on one contract can be difficult based on the many factors that go into this type of calculation.
When working with your accountant, you’ll need to account for the various costs that go into a construction project, and to keep accurate records it is recommended that you record costs daily or at least weekly. This will include various categories such as:
- Indirect costs (not directly assigned to a project; immediately expensed to Profit and Loss)
- Indirect labor
- Management / supervision
- Small tools
- Equipment, repairs, maintenance
- Selling expenses
- General / administrative expenses
If you have a project in progress, when taxes roll around there are some specifics to consider as far as revenue recognition. For each year a project will be worked on, one method to use is the Percentage of Completion Method. First estimate the total profit for the entire project, and multiply by the approximate percentage of the project that has been completed thus far. If a project will take more than one year (a long-term contract), you would complete the same calculation, and subtract the first year’s revenue to report for taxes.
The details that go into accounting for construction are not only necessary for tax time, but also for understanding how to bid on a project, determine which will be profitable, and confidently bill clients accurately and fairly. Cost estimation should include everything listed above, and be reviewed and updated regularly.
Construction Accounting Terms
Allowance: the dollar amount is given to a component of construction for the client to use as a guideline for how much something will cost. Costs often exceed this value and are then billed to the client.
Change order: a document is drafted and signed when a client wishes to make a change during construction, which includes any additional costs associated with the change.
Project, job: generally a signed contract between the construction company and the buyer. If however the project is valued at more than $2 million, it is broken into multiple “jobs”.
Phase: for projects valued at less than $2 million, the project can be broken into “phases”. For example in home construction, Phase 1 could be architectural design, permits, inspections, etc. and Phase 7 could be flooring.
Draw: funds are taken from a loan or project financing on a set schedule to pay for materials and contractors throughout a project timeline. Often done on a monthly basis.
Progress billings: a series of invoices produced at various stages of a major project for seeking payment for a percentage of work that has been completed to date. This paperwork will show what is due, any changes approved, how much has been paid so far, how much of the job has been completed so far, and the total amount that is due by project completion.
Fixed asset: property, plant, equipment – a tangible item used for more than one year. If your construction company owns vehicles or equipment, for example, you will need to account for these.
Construction in progress (CIP): the record of the costs of a construction project that is not completed, and which is not depreciated until it is placed into services, such as a building or manufacturing line.
Contractor: a person or entity entered into a contract to build, produce goods, or provide services (based on specifications of a buyer), as a general or prime contractor, a subcontractor under a general contractor, or a construction manager.
For more information on construction business accounting, and to learn about the financial statements required for keeping accurate records, contact us and we’ll be happy to answer your questions!
More construction tax tips found at irs.gov.
An authoritative source for construction accounting is written by the AICPA Accounting Standards division and can be found in PDF form through the University of Mississippi’s digital library.