Construction accounting is not the same as ordinary business accounting. It is a unique form of financial management and bookkeeping designed to help contractors keep track of each job and how the financial information involved with that job affects the whole company.
Construction accounting is a type of project accounting that assigns costs to specific contracts. For each construction project, a separate job entry is set up in the accounting spreadsheet. As costs are incurred for the project, they go into the spreadsheet with a unique number.
Directs costs for a construction project include all the materials for the job, labor costs, architectural fees, subcontractor costs, and consulting fees. Direct costs are based on estimates drawn from a detailed analysis of the construction method, the conditions of the job site, available resources, and the contract activities.
Indirect costs, sometimes called overheads, are costs that keep a business running. They occur because, in the construction business, there is no fixed location. Even if the company has an office, all of the work takes place where the customer needs it. Therefore, costs for travel time, moving job materials, tools, and equipment, delivering materials, and even cleaning the site are accounted for in financial statements.
Indirect costs are either fixed or variable. Several indirect costs are also coded into the spreadsheet, including:
Costs for a construction project will not include administrative costs unless arranged with the client.
Construction accounting requires special processes to record and manage financial transactions. The recognized method for recording transactions for construction companies is known as the double-entry method.
Accounting transactions impact a construction company’s finances in two ways. With the double-entry method, each transaction goes into the accounting ledger as two separate entries, recording both sides of the transaction. The double-entry system has two equal sides in the bookkeeping ledger; the left side is “debit,” and the right side is “credit.”
Construction businesses report income and expenses when reporting taxes as either percentage of completion or a completed contract.
Percentage of completion regards a construction company’s ability to match income and expenses and determine if a job will make a profit or be a loss. This approach recognizes incomes and expenses when they are received, and any tax calculations must be made then. This method avoids the ramifications of tax fluctuations and is the preferred approach for long-term contracts.
Under the complete contract method, income is not reported on any financial statements until the entire project is complete, and expenses are deducted at the end when the project is finished. Contractors defer their taxes until the end as well. There are some risks with this, as tax laws can be amended during the interim, increasing the tax burden to the company.
Odoni Partners, LLC is the premier construction accountants in Chicago, IL. We assist construction firms and other private companies throughout the Chicago metro area, offering construction accounting services, tax preparation and planning, and advisory services tailored to suit your business.
For more information, contact Odoni Partners, LLC at (312) 440-0960.