Construction Accounting – Revenue and Billing

Adjusting the Flow

For healthy and profitable construction businesses, it comes down to adjusting the flow of cash effectively. That means that construction accounting is the groundwork for establishing stability, security, and confidence for contractors.  

The key to adjusting the cash flow in construction is to recognize some fundamental elements that come into play at various stages – they are:  

• Revenue Recognition

• Progress Billing

• Job Cost Tracking

• Work in Progress (WIP) Records

• Change Order Impact

• Contract Retainage Reporting

What follows is a brief description of each of those elements as they relate to construction accounting. 

Revenue Recognition

In construction accounting, it is essential to consider the long-term nature of many construction contracts. They require specific revenue recognition methods (most commonly the percentage-of-completion method), which means allowing for revenue to be recognized as work is performed, rather than waiting until the project is fully completed.

Progress Billing 

Construction accounting utilizes progress billing. This is an incremental approach, often based on the percentage of work completed, allowing invoices to be issued to clients at various stages of the project. They frequently use the American Institute of Architects (AIA) billing format.

Job Cost Tracking

Within the framework of construction accounting, each project is essentially a separate profit center. Construction companies must meticulously track labor, materials, equipment, subcontractor costs, and fully loaded labor burden costs for each job to ensure profitability.

Work in Progress (WIP) Records

In construction accounting, work in progress refers to tracking costs and recognizing revenue for work performed on long-term projects. This tracking is often complex and spans multiple accounting periods. Recording work in progress involves tracking all project costs (labor, materials, overhead) and revenues. It consists of calculating the percentage of completion (Costs to Date / Total Estimated Costs) and generating regular WIP reports. These reports are used to compare earned revenue with billed amounts, ensuring financial health and identifying over- or under-billing to improve cash flow and profit management.

Change Order Impact

For construction accounting to work correctly, changes to the original contract (through change orders) must be formally documented, and their financial impact (on cost, timeline, and revenue) must be noted, tracked, and accounted for. Change orders have a significant effect on construction accounting, as they alter original budgets, timelines, and profit projections. Mishandling change orders can lead to underbilling, profit fade, cash flow issues, and potential legal or bonding problems.

Contract Retainage Reporting

At the base level, contract retainage reporting shows what the client retains as a portion of each progress payment (as a percentage or a specific amount) as security against future project completion. Construction accounting allows you to see contract value, invoiced amount, and the retention amount to date for all of your jobs. 

Construction accounting requires the tracking and reporting of retainage to be done separately from regular Accounts Receivable (A/R) because it's not currently due, affects cash flow differently, and impacts lien or payment deadlines. This means that a distinct general ledger account is used to accurately show the financial position and avoid overstating income or profit. In construction accounting, a "Retention Receivable" account is created to record funds received, and a "Retention Payable" account is created to record funds owed to others, thereby separating them from standard invoices.

The Final Word on Adjusting the Flow

Adjusting the flow of revenue and billing requires knowledge and insight concerning the many facets of construction accounting. What we haven’t mentioned is that it is also imperative to apply the correct tools (such as construction-centric software) to the process. For example, eliminating manual calculations by relying on the right software to calculate retainage automatically on every invoice avoids errors, saves time, and makes closing out a job and invoicing for the full amount owed quick and easy.

Is it time to revamp, improve, or start adjusting the revenue and billing in your construction company? Get in touch, and we can schedule a complimentary discovery call. 866-629-7735 

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? Contact us today to schedule a complimentary discovery call. 866-629-7735