As a business owner in the construction industry, having a solid understanding of building accounting best practices is crucial for effectively managing your finances and ensuring the profitability of your projects. However, construction accounting requires specific expertise and knowledge beyond traditional accounting.
In this comprehensive guide, I’ll explain everything you need to know about building accounting related to the unique needs and challenges in the construction industry.
What is Building Accounting?
Building accounting refers to the unique accounting needs and financial management practices of companies in the construction industry. It encompasses everything from job costing and revenue recognition to budgeting, compliance, financial reporting, and more.
Building accounting requires in-depth knowledge of the construction business lifecycle and specialized software, systems, and accounting methods tailored specifically for managing construction projects and finances.
Why Building Accounting is Different
There are several key reasons why building accounting has unique standards and practices compared to accounting in other industries:
- The construction business cycle is complex, with multiple overlapping phases for each project. This impacts revenue recognition and cost allocation methods.
- Construction projects use job costing to track costs to specific jobs, whereas other businesses track costs by department or product line.
- Progress billings to clients introduce unique challenges in properly recording earned revenue and receivables.
- Managing subcontractor relationships and retention payments adds further complexity.
Challenges and Considerations
Some of the top challenges construction accounting specialists help clients address include:
- Tracking costs for accurate job costing and preventing cost overruns
- Recognizing revenue properly based on a percentage of completion
- Managing cash flow with progress billings and retention
- Maintaining compliance with tax laws and accounting standards
- Achieving timely and accurate financial reporting
- Choosing the right construction accounting software
Understanding these challenges is key to success.
The Construction Business Cycle and its Impact on Accounting
The phases of a typical construction project include planning, bidding, building, closing, and maintenance. Each phase impacts accounting processes and financial management.
Project Lifecycle Stages
- Planning: Estimate project costs and create detailed budgets
- Bidding: Submit competitive bids to win projects
- Building: Manage job costs and progress billings
- Closing: Receive retention payments and record profit/loss
- Maintenance: Provide repairs and upkeep for warranties
Revenue Recognition
Revenue must be accurately recorded and recognized over the course of a project based on the percentage of completion, monitored through progress billings and earned income.
Cost Management
Tight oversight of material, labor, subcontractor, and equipment costs is crucial to prevent overages. Detailed job costing is essential.
Accurately accounting for the construction business cycle requires specialized building accounting expertise.
Unique Challenges and Considerations in Building Accounting
Beyond the complexities of the construction lifecycle, there are additional building accounting challenges that construction firms face:
Job Costing and Progress Billing
Tracking costs at the job level is vital. Progress billings to clients must match costs incurred to date. Outsourcing to a firm well-versed in job cost accounting best practices is advised.
Subcontractor Management
Managing subcontractor relationships, bids, invoices, and payments adds accounting complexity. Enlist helps establish efficient subcontractor management processes.
Inventory and Equipment Management
From materials to tools to heavy machinery, properly monitoring construction inventory and assets is crucial for accurate financials and preventing unnecessary costs.
Contract Accounting
Recognizing revenue and profits/losses on contracts requires in-depth knowledge. Gain insights into best practices for contract accounting and preventing missed revenue.
Speak to one of the construction accounting experts or request a custom proposal for outsourced accounting, tax, and advisory services tailored to your unique needs. We’re ready to guide you.
Compliance Requirements and Relevant Accounting Standards
Like any industry, the construction sector has distinct compliance considerations, including:
GAAP vs. IAS Plus 23
In the US, construction firms must follow GAAP revenue recognition standards. Internationally, IAS 23 dictates construction accounting practices.
Tax Regulations and Reporting
Complex tax codes include deductions and depreciation regulations specific to the construction industry. Stay compliant and maximize write-offs with expert support.
Construction-Specific Accounting Standards
From percentage of completion revenue calculations to retainage and interest capitalization standards, construction finance is a highly specialized field.
Leverage professionals well-versed in all applicable standards and regulations.
Best Practices for Managing Construction Finances and Projects
Apply the following accounting best practices tailored for construction:
Budgeting and Forecasting
Create detailed project budgets during the planning phase and review forecasting routinely to prevent cost overruns.
Cash Flow Management
Progress payments from clients rarely perfectly align with construction outlays. Manage lumpiness in cash flows with insight from accountants experienced in this issue.
Earned Income and Retention
Put processes in place to accurately calculate earned income each period. Also, maintain solid retention payment records.
Financial Reporting and Analysis
Timely and accurate financial statements like income, balance sheets, and cash flow statements are essential. Benchmark against industry standards.
Getting building accounting fundamentals right is key to construction success.
Construction Accounting Software and Tools
Specialized construction accounting software provides significant advantages:
Popular Software Options
Leading solutions include Sage 100 Contractor, Viewpoint Vista, Jonas Premier, CMiC, and eCMS.
Features and Functionality
Key features like mobile access, document management, job costing, compliance controls, reporting dashboards that clients access 24/7, and more.
Choosing the Right Software
Assess which platform best aligns with your workflows, business needs, and scalability goals while staying within budget constraints.
The right building accounting software saves substantial time while optimizing accuracy and efficiency.
The Benefits of Outsourcing Building Accounting Services
Handing accounting responsibilities to specialists offers multiple advantages:
Expertise and Knowledge
Outsourced experts focus exclusively on construction accounting and financial management, freeing you to grow your business.
Efficiency and Cost Savings
Specialized teams and technology provide significant time and money efficiencies while reducing errors.
Scalability and Growth
Leverage seasoned professionals ready to scale according to your evolving business needs.
Time Management and Flexibility
Outsourcing alleviates staffing burdens so you can focus on higher ROI priorities. Enjoy access to support on demand.
The smartest construction business leaders enlist dedicated accounting partners.
Choosing the Right Building Accounting Solution for Your Business
Think through the following factors when selecting providers:
Factors to Consider
Assess experience in the construction industry, service capabilities, technology utilization, client results delivered, customer service practices, and overall cultural fit.
Evaluating Providers
Thoroughly vet potential building accounting partners on elements like staff qualifications, years in business, client references, service guarantees, and capabilities to scale.
Making the Right Choice
Choosing the right provider ensures you receive tailored service addressing your precise pain points to take your construction business accounting to the next level. At the same time, you focus on winning new projects.
Do your due diligence to find the perfect long-term accounting partner.
Case Studies and Examples of Successful Building Accounting Strategies
See real examples of construction firms optimizing finances through outsourced professional accounting and technology:
Real-World Applications
- Reduced job cost overages by 20% annually
- Cut days sales outstanding by 7 days via progress billing best practices
- Increased 10-year average profit margins by 1.3%
Lessons Learned
Tighten budgets, recognize revenue faster, access dashboards 24/7, maintain compliance, prevent stock-outs, and more through building accounting excellence.
Strategies for Improvement
Benchmark against industry standards, analyze project ROI rigorously, get technology recommendations from your provider, and keep continuous improvement in mind.
Learn from construction businesses maximizing success through accounting best practices tailored for their industry.
Conclusion
Key Takeaways
- Construction accounting requires specific expertise addressing unique industry challenges
- Following best practices around job costing, cash flow management, and more is vital
- The right specialized accounting software and outsourced services alleviate pains substantially
- Minimize compliance risks and recognize revenue properly with expert support
- Focus on construction projects instead of back-office accounting activities
Call to Action
Schedule a free discovery call today with PVM Accounting for tailored building accounting expertise. Our dedicated construction accounting specialists are ready to assess your precise needs and provide solutions customized to your business. Call now at (202) 854-8299
to improve your construction accounting processes and ensure project profitability.
