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Construction accounting 101: What you need to know

Construction Accounting 101

Running a successful construction firm demands skills in planning and managing finances. This is where construction accounting software comes in!  You can use construction accounting systems to track money coming in and out and determine the profitability of different projects. You can also forecast your ability to pay bills and stay on the right side of the tax man.  Getting on top of your business finances will help you get back to your true passion for building and construction!

So let’s dive in and talk more about construction accounting basics.

Construction accounting is different

Construction accounting can be more complex than accounting for other industries because it’s much harder to match income with expenses. Projects could last several years but the bulk of payments may not come through until the work is 100% finished. There are other complications too, like:

Varying size and length of construction projects. This makes allocating costs and revenues accurately between contracts difficult.

Wide-ranging cost categories. Each project could have potentially hundreds of cost categories. Additionally, many costs normally treated as overheads in other industries might be categorised as expenses under construction accounting. Particularly if they’re attributable to specific clients or projects.

Greater range of available services. These may fall into categories such as:

  • Preconstruction consulting,
  • Owner’s representative services,
  • Program management,
  • Engineering,
  • General labor contracting,
  • Design management and sale of physical products and materials

Trying to allocate revenues to each service then matching them with every associated cost can be tricky.

Unfinished contracts or changes to work performed. While companies report revenues and expenses according to the proportion of work completed, problems arise when contracts remain unfinished, or when the work performed isn’t the same as what was initially agreed.

Construction Accounting

Construction accounting standard

Given the complexity highlighted, it’s important to understand the rules that are in place to govern construction accounting. The construction industry accounting standards explain when to recognise revenues and costs and how much of them to report.  

So in terms of revenue for example, you start by working out whether it’s appropriate to recognise revenue over time. If so, you’ll have to find a way of measuring your progress toward satisfying your contract obligations. There are different ways to measure your progress, either based on your inputs or outputs.

By recognising revenue over time, you can work out profitability for every period, rather than after the end of a project.

But accounting standards for the construction industry are highly technical, and it’s a good idea to talk to your accountant to make sure you’re following relevant rules.

Practical Challenges

Without doubt, having an accounting process capable of tracking profitability of each job is a big challenge for construction businesses.

Since a building firm might work on just a handful of projects each year, it’s vital that the profitability for each job can be analysed so you know how things can be improved. If a project wasn’t profitable, why not? Was the initial quote unrealistic or was the problem associated with costs blowing out?

The accounting process also has to provide enough information so cashflows can be accurately forecasted for big contracts. As clients are unlikely to pay upfront, construction firms must be able to identify and address potential cash shortfalls during the contract period.

Pillars of an effective accounting system for construction company

We’ve discussed how vital accounting is, but what are the things you’ll need in your accounting system to make it work for you?

Trained professionals

Experienced professionals with the right qualifications are a must. A construction account manager or a site manager would simply not have the specialist knowledge to perform accounting duties correctly. Finance staff should undertake regular construction accounting training to keep up-to-date.

Documented policies

Having an accounting policies and procedures manual for construction company staff is a great way to formally embed the way you do things, but check in regularly to make sure rules are being followed.

Automation

With the number of cost and revenue categories to keep track of, it makes sense to automate as much as you can with cloud construction accounting software.

Being connected to the cloud means you can track your finances and update your accounts from virtually anywhere, as long as you’ve got an internet connection and a computer or a mobile device. You can check your firm’s cashflow and financial health at any time.

cloud construction accounting

Invoicing clients could be done on the spot with reminders sent automatically. Documents could be stored securely online, and you can link third-party apps to take care of other aspects of your operations like inventory management, project management, time tracking, payroll and more.

These capabilities offer significant time savings, reduce manual input, and lower the chance of errors.

Construction accounting software cost may be less than you think. Leading software providers offer tiered subscription plans so you can tailor services to suit your budget. Additionally, POP Business can get you connected to Xero at a 20% discount.

Xero accounting automation

Expert guidance

Hiring an accountant is key to build the right foundation for your business and to make sure you’re doing everything right. While an internet search on “construction accountants near me” will return a list of professionals close by, it’s a good idea to choose someone based on their experience and knowledge in construction accounting.

We’ve got plenty of qualified accountants at POP who can take the burden of accounting and tax compliance off your shoulders. What you’ll love about us is that we’re a future-thinking cloud-based company and embrace the latest technology.

We can help you set up an efficient bookkeeping system and show you how to make the most of your accounting software.

As an accountant for construction clients, we can also explain how you might structure your business to reduce the risk exposure of your personal assets. Once you’re all set with the fundamentals, we can continue to lend a hand by helping you make sense of your numbers, forecast cash flows, minimise your taxes and prepare your tax returns and BAS statements.

If you’re looking for trusted modern-day accountants to provide you with accounting services or high-value business advice, talk to POP today!

Sidney Cachuela

Sidney Cachuela

Sidney Cachuela is a Business Mentor and Associate Financial Advisor who genuinely revels in solving the sorts of wicked problems facing business. His experience includes working with high profile wealth managers and financial advisers, including managing $100m of client FUM across 200 clients. In 2018 he co-founder POP Business, a cloud-based accounting firm. Sidney is a complete technophile, and believes that innovation and new tech are the way forward. POP Business is his labour of love. He has expertise in helping small businesses with a range of accounting services, including: financial advice, accounting and bookkeeping, GST tax planning, as well as company, trust and partnership tax returns and more.

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