What is Construction Accounting?

Construction Accounting

A contractor’s job is never done. Communicating with clients. Supervising employees. Ordering materials. Not to mention the actual physical work that goes into building and remodeling projects. And then on top of everything, you have to deal with construction accounting…a task that can eat up your time and quickly become a giant headache.

That’s because construction accounting requires a completely different skill set than the regular accounting that most people are used to.

Here are some of the differences, and the reasons why the task of construction accounting might cause you to slowly lose your mind, as well as your profits.

It does not take place in a fixed location

For most businesses, a fixed number of products or services arrive and depart from the same location. But in construction, you have to track a dizzying array of costs and profits from numerous jobs, all taking place in different locations.

It is important to track, report, and categorize costs and other expenses correctly for your business and all of your client jobs.

You have to account for many more sales categories

In other businesses, you typically only have 1-4 categories of sales. But in construction, you are selling labor, materials, consulting, design, and much more. Your sales category could comprise as many as 10 different categories, making it much more of a moving target. Keeping them straight requires an awesome feat of organization, an eye for detail, and clear communication among different teams.

It’s difficult to calculate the break-even point

Normally, there is a direct relationship between the income and expenses involved in selling a particular product, giving you a clear, straightforward break-even point. In construction, this is not the case. That’s because there are too many categories of profit and loss to track in a simple way. Besides that, each job is different and incurs its own unique expenses and income.

Of course, you already know that failing to accurately find your break-even point can have disastrous results. It can result in taking projects that lead to a loss rather than the profit expected. And that’s a very expensive mistake which you can’t afford to make too often.

The need for job costing goals

In regular accounting, only a few very simple reports are needed: Accounts Receivable, Accounts Payable, Profit & Loss, and Balance Sheet. But not so with construction accounting. To get it right, you require these in addition to many other types of reports. One of these is a Job Costing report. This job-specific report shows the projected expense and revenue for each phase of the project.

These points really just scratch the surface of all the many moving parts that go into accurate construction accounting.

It’s essential that whoever keeps your books understands the nuances of construction accounting. Otherwise, you risk costly misallocations and bad decisions about what jobs to take and which to leave.

A good construction accountant will know how to create detailed reports which take into account all the many and nuanced categories you need to keep track of.

And that way you can get back to what you do best: planning your next big construction project.