By managing accounts receivable and accounts payable, software can help contractors ensure they collect what they’re owed and stay on good terms with suppliers. Construction accounting software should also help to ensure accurate tax filings, with enough flexibility to support the range of revenue recognition methods used by the construction industry. Construction accounting software helps automate standard processes like job costing and estimate comparisons and also enables contractors to better track a project’s profitability. It’s a full accounting software package, with a job costing capability that allows you to generate cost reports and check job cost journals, labor journals, and billing summaries. Many accounting reports are required to analyze your construction business’s financial health.

This cycle continues throughout the life of the construction company, which gains a competitive advantage by using real-world job cost data to optimize bids, estimates, profit margins, and more. Before the next project, management analyzes past job ledgers to create more accurate estimates and bids based on real-world costs. The total number of units or segments is often unknown at the start of the project. With unit price billing, you can add additional work or materials to a project. Unit pricing works best when a project can be divided into clear units or blocks, such as paying for gravel by the load.

ACA & W-2 Services

Can benefit your company by establishing a modern experience, increasing security and control, and reducing excessive operational costs like managing payments manually. A chart of accounts is a listing of all the accounts used by a business to record transactions in its general ledger. Also, it gives you sufficient information to make smart financial decisions.

Even if you’re away from the desk and working on a job, there are easy-to-use apps that make bookkeeping on the go simple. An easy fix for this is opening up a separate account that’s solely for business if you haven’t already. This will help distinguish building materials from your weekly supermarket shop. Janet Berry-Johnson, CPA, is a freelance writer with over a decade of experience working on both the tax and audit sides of an accounting firm. She’s passionate about helping people make sense of complicated tax and accounting topics. Her work has appeared in Business Insider, Forbes, and The New York Times, and on LendingTree, Credit Karma, and Discover, among others.

Retainage

Since construction contracts typically take place over long periods of time, payments may be made in periodic increments or at the time of completion on all work of the contract. In cases where payment is assured within that period, the percentage of completion method may be used to account for revenue and expenses. These added facets make construction accounting different and require special processes. In the accrual method, revenue and expenses are recognized in the period earned or spent, instead of when they’re paid or received. Many construction businesses find this method difficult, as long-term contracts spill across more than one fiscal period.

For example, a company using the accrual method will note revenues based on billed payments even if they have not actually received payment. The purpose of retainage is to ensure that owners have some assurance that contractors complete the entire job rather than abandoning work after progress payments are made. However, retainage can lead to significant cash flow challenges for contractors, who may lack the working capital necessary to take on new jobs if earned income is withheld. One potential downside of construction bookkeeping the percentage of completion method is that businesses may incidentally underpay or overpay for taxes depending on how accurately they estimate costs. Companies that underpay taxes must pay interest to the IRS on the amount underpaid, while companies that overpay will receive a return with interest — which is usually not as valuable as having cash on hand. Construction businesses that have annual revenues exceeding $25 million over the last three years are required to use the percentage of completion method.

IFRIC 15 — Agreements for the Construction of Real Estate

One of the primary complications of construction accounting is that projects have extremely variable completion times. You may be able to finish some within a few months, but others will span multiple tax years. Brittney Abell joined Procore after 6 years as an accounting manager for a commercial general contractor, overseeing accounts payable and receivable. Previously, she worked as a contract administrator for an architecture & design firm. She has worked on a variety of building projects, including travel stops, restaurants, hotels, and retail warehouses raging from $2M to $20M.