Comprehensive Guide to Construction Accounting: Basics to Advanced

Job cost sheets are a major part of construction accounting, as accountants use them as a financial guide. These sheets offer a microscopic view of expenses for specific tasks or project stages. Due to the nature of construction, production is inherently decentralized, meaning it happens on various project sites instead of a single location. This means construction accountants must account for travel and equipment reinstallation costs as workers and equipment constantly shift between projects.

Recognition of Revenue and Costs

As a result, contractors in multiple jurisdictions have to watch out for double taxation. Managing different wage scales across jurisdictions requires careful attention to wage and hour laws. Contractors must then certify their compliance on each project using certified payroll reports that may vary between different states or agencies. Prevailing wage legislation requires contractors to pay the rate of compensation that’s standard, or “prevails,” for each worker classification on similar jobs in the area. Construction firms who work on public projects commonly have to navigate prevailing wage payroll, often called “Davis-Bacon payroll” after the landmark Davis-Bacon Act.

What Is Retainage?

The compensation becomes part of the contract revenue if the claim is valid and meets contractual criteria. Staying compliant with these regulations is essential to avoid fines, legal issues, and reputational damage. It also ensures that financial statements accurately reflect the company’s financial position. The income statement (or profit and loss statement) provides a breakdown of the revenues, costs, and profit during a specific period of time — often monthly, https://azbigmedia.com/real-estate/commercial-real-estate/construction/how-to-leverage-construction-bookkeeping-to-streamline-financial-control/ quarterly, and annually.

Construction accounting: Step-by-step & best practices

Current Ratios evaluates how a company can use its current assets to cover its current liabilities. Larger businesses and those who maintain inventory must use an accrual basis of accounting to comply with U.S GAAP (Generally Accepted Accounting Principles). This reaffirms how important it is to account for all costs in a project regardless of whether the project makes or even loses money. Common scenarios for change orders include the owner requesting adjustments like moving a wall, adding a window, or changing the flooring material. These are called ‘additive change orders’ and typically increase the contract price. This is why construction companies find it difficult to match the efficiency of organizations that make the same products repeatedly in a single location.

• Revenue recognition is how a a business determines when they’ve officially earned revenue from a contract or project.
• Remember, effective construction accounting is not just about number-crunching and financial statements–it's a powerful tool for informed decision-making and business growth.
• A well-drafted contract minimizes disputes and ensures that all parties have a clear understanding of their responsibilities.
• However, retainage can lead to significant cash flow challenges for contractors, who may lack the working capital necessary to take on new jobs if earned income is withheld.
• Construction projects involve varied costs – labor, materials, machinery, subcontractors, and more.
• Also known as a T&M contract, contractors are reimbursed for material costs, and labor costs are paid at a fixed hourly or daily rate.

A contractor submits proposals for constructing a new office building and renovating an existing one. In this scenario, the contracts may be treated How to leverage construction bookkeeping to streamline financial control separately due to the distinct nature of the proposals. Let our team of on-demand CPAs handle your accounting and technology, so you have more time to focus on what you are best at – running and growing your company. Procore is committed to advancing the construction industry by improving the lives of people working in construction, driving technology innovation, and building a global community of groundbreakers.