Updated at 08/06/2022 - 11:45 am
Accounting is one of the most important aspects of management and operations in business. In companies with multiple operating divisions, accounting that accurately tracks the movement of assets in and out of the company is necessary to ensure both transparency and profitability. In the construction industry, companies and contractors face unique challenges when it comes to accounting. In this article, we'll look at what those challenges are, identify the key differences between construction accounting and conventional accounting practices, and emphasize the importance of adopting a software solution to improve your accounting and make you more money as a construction company or contractor.
1. What is unique about accounting in construction? #
It is important to understand that construction accounting is different from conventional accounting. A typical business such as a restaurant or commerce uses typical accounting principles. This model works perfectly for that type of business – selling products from a fixed location. Businesses understand the cost of each item sold, and operating expenses are kept relatively constant.
In contrast, construction businesses are mobile and get customized work done at new locations (sites) on a regular basis. As a result, construction companies must monitor completely different types of costs: travel time, travel costs such as packing tools and equipment, delivering materials to the job site, and even Clear the site of excess material upon completion of the job. In a sense, the business has no fixed location and it is delivered wherever the customer needs it, along with the materials needed for the job.
Construction companies also use the Percent Completion Method, where revenue is calculated based on an estimate of what percentage of a project has been completed. This further makes it difficult for construction companies to implement cost accounting methods that allow accurate tracking of their costs to accurately predict profits and losses.
2. Key differences between General Accounting and Construction Accounting #
a) Revenue from business activities
Businesses frequently make sales by often offering "complete package-specific" types of products and services so that revenue is clearly identifiable.
In contrast, construction businesses have very specific revenues, which typically include:
- Initial revenue recorded in the contract;
- Performance increases, decreases, bonuses and other payments if these are likely to result in a change in revenue, and can be reliably measured.
Detailed instructions for recording revenue from construction activities are as follows:
b) Cost of goods sold
Conventional businesses simply need to keep track of the cost of products sold. In construction accounting, it's never been so simple. Each job must bear both direct labor costs and indirect labor costs for hundreds of items. Their sum will form the cost of goods sold.
c) Cost / General expenses
In conventional businesses, the difference between Cost of Goods Sold and Expense is clear, in construction it is not. Many items that are normally overhead are in rebuilding as cost of goods sold, because these costs are directly linked to the customer project.
d) Break Even Point
In conventional businesses, the direct relationship between revenue and costs makes the break-even point very easy to calculate. However, in construction, there are too many lists of items, so it is not easy to calculate the breakeven point in a project. In addition, most projects are "one-of-a-kind" custom jobs, with varying requirements of complexity corresponding to the various costs involved.
e) Project accounting technology for construction companies
Construction accounting is significantly more complex than most businesses. If you can track, report and categorize expenses and other expenses in your construction business it is very important to understand how to bid on projects, which projects are profitable for the business. your business, how to properly and accurately bill your customers, and how to make the most of your company's resources.
Accurate expense management requires daily reports to be generated within departments and submitted to the accounting department on a regular basis. Accountants must enter reports into the accounting system frequently, a process that is time consuming and creates a backlog of paperwork.
An integrated software platform that allows frontline workers to complete and submit daily expense and progress reports, time cards, and order changes is an effective way to keep track of what costs are incurred in the future. a project. Better yet, reports are instantly digitized and accessible to both field workers and accounting departments, allowing for quick resolution of any cost issues and accurate tracking to ensure profit.
3. Advice for construction activity accountants #
Improving your construction company's accounting procedures starts with understanding the different types of costs that can be incurred while working on a project. The next step is to categorize those costs effectively, understand the different nature of project costs, general administrative costs, and cost of goods sold, and appreciate the complexity of the projects that are required. your company is capable of doing.
The best way to ensure that accounting is organized scientifically, appropriately and accurately is to deploy a solution to build a separate accounting management process for the construction company. This practice saves time and additional costs, manages the construction company efficiently, and ensures that the required data is fully tracked.