Bookkeeping is an essential part of any business. However, Construction companies have unique accounting processes requiring special attention to detail.
Construction projects have long production times and expensive inputs that can change over time. This requires project-centric accounting and careful tracking of costs and revenue.
A key component of this system is the chart of accounts (COA). This will organize financial transactions and build the foundation for your company’s financial statements.
Chart of Accounts
For construction companies, a well-structured chart of accounts is critical to accurately tracking costs and income. The graph of accounts is a numbered list of all the accounts used in your general ledger, allowing stakeholders to access specific transaction records and data quickly.
It is generally coded so that balance sheet accounts like assets, liabilities and equity are listed first, while income statement accounts like revenue and expenses are listed last. Each account name is then assigned to a particular account type which can be broken down into four primary categories: asset, liability, revenue and expense. This information lets you make informed financial decisions based on your company’s needs and goals. It also enables you to calculate profit for each project, including job costing accurately.
Construction accounting software can simplify and speed up your invoicing, bookkeeping for construction companies, and reporting processes. It can also streamline payments by offering clients a secure, convenient online payment method. Some software integrates equipment-use tracking and depreciation schedules, while others provide a payment solution that facilitates checks or ACH payments.
A general ledger is a master accounting document that comprehensively records changes to your business’s asset and liability accounts, equity, revenues, and expenses. Double-entry accounting allows all journal entries to be posted to the general ledger for a given reporting period. This is then reconciled against an unadjusted trial balance (a report listing each account’s starting and ending balance). The goal is that debits must equal credits. The result is the net income for that period.
Accounting for construction companies is complex and often leads to costly mistakes. A CMiC solution creates a centralized record of past and present financial transactions for better budgeting, forecasting, and reporting.
Construction accounting differs from regular business accounting due to project-based revenue recognition, per-project pricing, and fluctuating operating costs. Contractors may choose between cash, accrual, percentage of completion, or completed contract methods for revenue recognition.
In addition, construction contracts frequently include a payment clause called retainage. This is a percentage of contract payments that are withheld until the client is satisfied with progress on a project — freeing up working capital for contractors. Accurate billing is critical to maintaining a healthy profit margin in these cases. Construction accounting software includes bill and receipt tracking, allowing managers to generate precise client invoices.
Construction accounting is complex because of the many factors affecting revenue recognition and profit calculation. These include differing prevailing wage and labor standards at different job locations (which produce varying withholding tax rates), changing union regulations, and project-specific cost tracking like equipment rental, materials purchases, and employee time-tracking.
Additionally, a construction company’s chosen accounting method and contract types (like T&M, unit price, or guaranteed maximum price) influence its profit recognition practices and reporting. For example, the accrual method recognizes profit based on costs incurred rather than when cash is received, or bills are paid. This gives financial managers a clear view of the financial horizon as projects progress and can also improve project pricing by factoring in overhead expenses. Construction accounting software often enables this feature by integrating with project management software and facilitating project-based billing.
Construction accounting goes beyond the traditional general ledger by tracking and categorizing costs and revenue based on each project’s unique circumstances. These include a project’s start-up and mobilization costs, equipment use and depreciation, labor rates, union status in different localities, and state and federal withholding taxes.
Some construction accounting software features integrations with equipment-use tracking systems to record the company’s fixed assets and depreciation schedules. These data inform the financial records and reports in the accounting system.
Other construction accounting software includes features to help contractors track incoming and outgoing cash. These may include integrations with business bank accounts to record expense transactions automatically and with payment solutions allowing contractors to cut checks or facilitate ACH payments. They may also support multiple revenue recognition methods such as completion percentage, cost to complete, and accrual.