Key Construction Accounting Practices

Construction accounting – it’s different. Construction accounting requires a few key practices that set it apart from “regular” accounting protocol. When you understand the key practices and how to address them, you can make the transition to sustainable growth and a more profitable construction company. Here is a breakdown of what to look for.

Revenue Recognition

Let’s start with this doozy. Construction contractors must track revenue and costs over extended contract periods to ensure accurate financial reporting and compliance. That means methods like percentage-of-completion (POC) allow contractors to recognize income as work is completed, rather than only when the job is finished. 

Contract Compliance

You’re not called a construction contractor for no reason. There is an understanding that contracts are an integral part of how you operate. But there is more to it. It goes beyond winning the bid and signing the contract. You must meet the terms of loan covenants, various insurance policies, bond specifics, and your own subcontractor needs.

Within the scope of contract compliance, there is a need for Change Order management. This entails accounting for scope changes and their financial impact on contracts. 

Tax Trackable  

You’re right, every business owner must adhere to sales tax, payroll tax, and other federal, state, and local tax laws. But construction contractors face unique tax laws and considerations, primarily concerning accounting methods, the ability to expense certain costs, and how sales tax is handled at the state and local levels.

Worker Classification

When it comes to worker classification (or misclassification), we’ll borrow from one of President Kennedy’s famous speeches and put it this way: “Don’t ask what your employee can do for you, ask what you can do for your employee.” Misclassifying employees as independent contractors is a common violation that can result in unpaid wages and benefits. 

But there is another side to this coin. The folks at Darrow say, “Employers who misclassify their employees as independent contractors, whether intentionally or unintentionally, may be liable for significant penalties and costly liabilities. Over the years, federal regulations and evolving interpretations by the Department of Labor (DOL) have raised the stakes, making it critical for businesses to understand and follow the guidelines for proper worker classification.” 

In the past, construction contractors who misclassified workers may have received only a slap on the wrist. That is no longer true. Fines, penalties, and reputational damage are all distinct possibilities for those caught misclassifying workers. 

Other Key Accounting Practices for Construction Contractors

While the above subtitles focus on accounting practices with legal implications, the following list outlines a few practices that support meeting the required standards.

Job Costing: Detailed tracking of direct costs (labor, materials, subcontractors, and equipment) and indirect costs (small tools, travel) per project is crucial for accurate reporting as well as maintaining profitability.

Work-in-Progress (WIP): WIP reports are necessary to balance completed work against billings.

Progress Billing with a Schedule of Values (SOV): The management of payments tied to project milestones.

Note: One of our favorite tools for the process is Knowify. Our Quality Control Manager, Leslie King, says, “Knowify lets you create an SOV when you create your contract. Then, when you make your progress billing invoice, it displays detailed progress against each line item, along with running totals and balances.” 

Chart of Accounts (COA): A complete, organized list of every financial account a business uses to track money, acting as the backbone for its general ledger to classify all transactions like assets, liabilities, equity, revenue, and expenses, using unique numbers for easy identification and reporting. It is used to support job costing, WIP, and retention tracking. 

What All This Means For Construction Contractors

Proper construction accounting practices take into account all the legal ramifications as well as methods that enable contractors to meet required standards.

Just as importantly, effective construction accounting provides construction companies with the means and methods to plan strategically, manage cash, and build bids with confidence.  

If you are interested in learning more about how The Profit Constructors can help you meet legal requirements in your accounting processes AND gain strategy, cash flow, and bidding confidence, then get in touch today! 

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