- Construction accounting is very complex.
In “regular” accounting (as I like to call it), there are debits and credits, chart of accounts, and general ledgers. Well, in our industry we have all of that, PLUS a laundry list of all the other items that we have to determine:
- G/L accounts
- Vendors/customers
- Job
- Phase
- Cost code
- Cost class
- Project class
- Sales tax jurisdiction
- Division
- Equipment
- Labor burden and/or indirect cost allocations
- Construction accounting is time intensive.
In looking at the above list of bulleted items, entering and managing our transactions takes longer than it would with simple transactions. We don’t just code the account, we’re also coding the job, the cost code, the cost class, etc. What would take only a minute in regular accounting might take you 3-5 minutes in construction accounting. Those additional minutes all add up!
- Construction accounting works best with the right software.
Because there are so many inputs for construction accounting, having software built specifically for our industry is a huge benefit. Construction accounting software organizes data into more usable formats (estimates to actuals, WIP).
Unlike years ago, many software options exist right now and you can get the specific type that you need for your business, instead of having to wait or starting with a general piece of accounting software. (In case you didn’t already know, QuickBooks is not specifically built for construction!)
- Construction accounting has its own guide.
Because construction accounting is special and unique — with a lot of rules and procedures — the AICPA produces a separate guidebook just for this type of accounting. This just further demonstrates the complexity of accounting in our industry.
- Construction accounting isn’t usually taught in school.
Many accounting programs cover a very small amount of time (if any!) on construction accounting in the curriculum. When I was in college, there was a little bit of manufacturing and job cost accounting, but that was the closest it got to the level of complexity within construction accounting.
If you are hiring an accountant that’s new to your organization and the industry, they’re going to need to be taught construction accounting — either by someone in your organization, a mentor, an outside accountant.
- Construction accounting usually has timing differences that affect net income.
Because costs and billings don’t always line up perfectly, construction accounting typically has timing differences that need to be addressed in order to report the proper amount of net income. We have a buildup of costs, and then we bill. There are specific methods to deal with these timing differences (many of which we cover in our Atlas CFO courses). Once you understand these timing differences and how to account for them, the business runs smoother and performance is easier to not only see but also to project.
- Construction accounting has more than one tax treatment.
This one surprises people sometimes. We have a revenue-based determination here in the U.S. If you’re over a certain size, it’s mandatory to go with a particular method. If you’re under a certain size, however, you can choose the method.
- Construction contractors over $25M are accrual/percent complete taxpayers.
- Construction contractors under $25M can be cash basis taxpayers (most choose this method).
Due to changes over the years in these numbers, you could be accrual if under $25M. Just keep in mind that both methods are proper, and it’s normal if you have two different sets of numbers at the end of the year.
- Construction accounting cash flow management is more complex.
Cash flow in our industry is not as simple as “dollar in, dollar out”! There are so many more pieces to it than that:
- Not just based on vendor terms
- Retention
- Pay when paid laws; paid if paid laws
- Subcontractor terms and paperwork
You’re not alone if you feel like cash flow management is complex and overwhelming – it’s the nature of our business! But once you understand how the cash flow works, you can figure out a way to manage it. We have lots of materials and resources on this particular topic!
- Construction accounting is important in getting work.
More and more projects are requiring financial statements in order to be considered for the job.
The condition of your financial statements can mean the difference between getting the job or not!
When we have good construction accounting practices and good job cost data, we’re able to have a better estimate. And when we have better estimates, we know that when we get the job, we’re going to end up with a better profit from it.
- Construction accounting is important in securing bonding.
Not only are financial statements important for estimating and getting jobs, they are also used to determine financial stability for a bonding program. So, the condition of financial statements can mean the difference between getting the bond or not. Bonding and sureties are a part of getting work. Having good records and understanding what they’re telling you will help you have great conversations and great relationships with your bonding agency.