Construction Accounting and Running With the Big Dogs!

Running With the Big Dogs

When operating your construction business, there comes a time when you must choose; you can Run With the Big Dogs, or you can dog along running. 

Construction accounting is the pivot point. No matter how good you are at the hard skills of your trade or the soft skills necessary to own a business, your numbers (the accounting) are the foundation for building your construction company. Dealing with those numbers can be either a hassle and hindrance or a benefit and advantage.

Construction Accounting Has Unique Rules

Construction accounting has specific legal and regulatory requirements unique to the construction industry, including in the areas of:

• Project-based and long-term contracts 

• Lien laws 

• Insurance requirements

• Revenue recognition (like percentage-of-completion)

• Specialized billing methods (like AIA progress billing, cost-plus, or time and materials)

Construction Accounting Has Exceptional Components

Construction accounting requires knowledge of various components that serve as the building blocks for meeting legal and regulatory requirements. Some of these components include: 

• Job costing

• WIP reporting 

• Retention or retainage

• Progress billing

• Change orders 

• Plus specific rules for government contracts

The components are not required by law, but they do help meet legal and regulatory requirements. For example, while there isn't a "WIP law," specific rules related to revenue recognition, accurate financial statements, and fair reporting of income and assets create a mandatory need for job costing and WIP reporting to demonstrate progress and profits on contracts.

It’s More Than Rules and Regulations

Let’s put it this way: while regulatory compliance is essential for legitimately managing the accounting matters of a construction company, there is more to consider. 

Suppose you get stuck with the mindset of only meeting legal requirements. In that case, you miss the most critical aspect of construction accounting – managing your business with a well-informed and discerning perspective. 

Yes, construction accounting involves adhering to laws, codes, and standards. It also consists of following the fundamental principles of financial management that lead to business health and profitable outcomes. Some of the tangible ways that proper construction accounting allows you to manage your business better are:

• Manage cash flow

• Budget wisely

• Develop savings strategies

• Build an emergency fund

• Reduce high-interest debt

• Take advantage of investment opportunities

• Protect assets 

• Continually learn and adapt

Dog Along Running or Run With the Big Dogs

Construction accounting, when done correctly, enables construction company owners to move from a state of distress, distraction, and disarray to one of calmness, composure, and clarity.

Knowing your business numbers means tracking key financial metrics and operational data to understand your company's actual state of health. It allows you to see the complete financial picture, so you can: 

• Make smart decisions. 

• Discover growth opportunities. 

• Remain profitable. 

Construction accounting involves regularly reviewing data, understanding the reasons behind changes in numbers, and applying insights to inform pricing, budgeting, and resource allocation. Construction accounting enables you to examine the past, address the present, and plan for the future.   

What’s Next

In the next three posts, we’ll take a closer look at how construction accounting deals with:

1. Key Regulatory Construction Accounting

2. Construction Accounting – Revenue and Billing

3. Lien Laws and Construction Accounting

Ambitious Construction Contractors look to The Profit Constructors to provide advocacy in dealing with:

• Clients and customers

• Employees and subcontractors

• Vendors and service providers

• Governmental entities 

Working with The Profit Constructors gives Construction Contractors the means to organize their operations in ways that help them:

• Remain informed

• Avoid hassles

• Reduce risks

• Be future-ready

Ready for action? Or want to know more? Get in touch today to schedule a complimentary discovery call. 866-629-7735