The key Aspects of Construction Accounting

by Adagio Admin | Feb 26, 2020
<p>Many vertical market software solutions have automated and simplified their customers' unique requirements, including the construction industry. However, the accounting needs remain complex, and the requirements for construction accounting reporting can be challenging compared to other sectors. These businesses are not just going to calculate debits and credits but also need the proper tools and techniques to address their complex accounting needs. </p> <p>So, whether you are on a quest for a better solution or you already have one you're happy with, make sure you have the means necessary to manage these <strong>four</strong> <strong>critical aspects of construction accounting.</strong></p> <p><strong><img src="/images/default-source/default-album/construction-industry.png?sfvrsn=ebcc080_0" data-displaymode="Original" alt="construction-industry" title="construction-industry" /></strong></p> <p><strong><em>1. Revenue Recognition</em> </strong></p> <p>Unlike many businesses, the cost and revenue calculations are not easy in the construction industry. Small companies may choose a revenue recognition method referred to as the <strong>Cash basis,</strong> where the money is counted as income when received and expensed when spent. In the construction world, Cash basis accounting would leave you broke; it's the most ineffective method of accounting for construction because the money received is typically much later than when the money spent. </p> <p>Sole proprietors, new businesses or businesses with no inventory use the cash basis method for its simplicity; however, most businesses use the <strong>Accrual Method. </strong>Accrual basis accounting applies the matching principle, matching revenue with expenses in the time in which the income earned and the expenses occurred. This method is more complicated than cash basis accounting but provides a significantly better view of the financial affairs of the business. </p> <p><strong>Percentage Completion Method </strong>recognizes<strong> </strong>revenue and expenses over a period, considering the percentage of the project completed to date. The deposits on the yet-to-complete part of the job are tracked separately as a liability until earned. This method is preferred to account for long-term projects.</p> <p>The income isn't reported until the entire job is finished in <strong>the Completed Contract Method</strong>. Income and expenses are tracked, and invoices are made throughout the contract period. But, the profit is recognized when payments are made towards the project, or once the project is completed. </p> <p><strong>What should you look for? </strong></p> <p>Accounting software that solves construction accounting difficulties should have multiple revenue recognition methods for the business to choose from; <a href="https://www.softrak.com/solutions/industry/construction">Adagio Accounting</a> has five revenue recognition methods available.</p> <p><strong><em>2. Job Costing</em></strong></p> <p><strong></strong>A project can often have many stages of work, many contractors, subcontractors, and several temporary employees. These temporary workforces will work on the project for a day or maybe a week, whenever needed and often don't get paid using your payroll system. It's vital to be able to account for multiple vendors on a job to ensure you have control over allocating the correct budget to the right phase, job and client.</p> <p>Tracking accurate costs, types of expenses and production activities by project is the key to managing projects efficiently. </p> <p><strong>Job costing</strong> is like General Ledger for a project, tracking cost types, cost activities, and project completion. Cost activities may be associated with different levels or phases of a project, such as roofing, painting. Comparing estimated costs to actual expenses provides insights for future projects and services and helps businesses to ensure ongoing profitability.</p> <p><strong>What should you look for? </strong></p> <p>Detailed and project-specific accounting software that manages all associated costs efficiently and with accurate <a href="https://www.softrak.com/products/job-costing/jobcost">job costing</a> and <a href="https://www.softrak.com/products/job-costing/production-tracker">tracking</a> capabilities. </p> <p><strong><em>3. Reporting and Job Tracking</em></strong></p> <p>Usually, construction companies deal with multiple projects in different locations at the same time. Tracking every project smoothly and efficiently can be a challenge considering that some projects may take years to finish. </p> <p>Misplacing a record or failure to report an expense can impact the profitability of the project and also the business. Every single spending on a project should be reported and tracked daily to manage costs as they incur. Active job Tracking systems enable firms to compare actual costs to estimated expenses, providing valuable insights for future projects. </p> <p>Getting all the expenses to the accounting department as quickly and accurately as possible is vital. Failing to do so results in backlogs, missed opportunities and can impact decision making. </p> <p><strong>What should you look for? </strong></p> <p>Solutions that allow a business mobile access to the accounting details and <a href="https://www.softrak.com/cloud/adagio-cloud-products/reporting-cloud">cloud-based reporting</a> can be an added advantage for construction companies feeling the weight of managing their complex needs. </p> <p><strong><em>4. Cash Flow Management</em></strong></p> <p>When it comes to a construction business, maintaining a positive <strong>Cash Flow </strong>is vital. According to a U.S. bank study, 82% of businesses fail due to poor cash flow management or poor understanding of how cash flow contributes to a business. Budgeted spending, periodic invoicing, updated payables, updated receivables, and accessing accurate financial reports helps in controlling positive cash flow.</p> <p><strong>What should you look for? </strong></p> <p>A software with <a href="https://www.softrak.com/products/financials/invoicing">robust invoicing</a> functions that integrate to accounts receivable and the general ledger.</p> <p><strong><em>Conclusion</em></strong></p> <p>Tracking cash flow and profit margin in a construction business is often different than in other industries. Comprehensive accounting software with robust revenue recognition and expense tracking methods, made for construction businesses, is essential for you to be a successful contractor. </p>