how to do construction accounting

It’s used for predicting cash needs in the future and to inform business decisions like financing equipment purchases. GAAP is based on 10 principles that inform the procedures used to record financial transactions, and those principles help ensure that financial reports are accurate and truthful. Any business that releases financial statements to the public or is publicly traded has to use these principles in its accounting practices. Cash flow statements help with forecasting and ensure that you have money to cover your expenses.

Construction accounting software is known as SaaS, or Software as a Service, and software in this niche can get expensive. It’s important that construction companies compare pricing to ensure that the amount they’re paying is sustainable and will pay for itself in improved efficiency. Cost of goods sold makes up a substantial portion of a construction company’s expenses. Most purchases are related to projects, either for labor or materials. You should also take advantage of digital routing and approval processes if your accounting software allows them.

Fluctuating Overhead Costs

These can include union reports, workers’ compensation, new hire reporting, and equal employment opportunity minority compliance. The construction industry has seen significant changes in the past few years. Whether you are in public accounting, performing assurance services, or operate in the industry, this guide has the information you need to perform at your best. Construction accounting systems have evolved from simply recording transactions to providing key insight into the performance of the firm, project by project. Business intelligence refers to the more sophisticated analytics available in leading systems. Users should be able to run ad hoc reports and slice and dice data from the system to answer critical questions about the business.

What is GAAP construction accounting?

Construction accounting is a specialized type of accounting tailored to accurately reflect the unique nature of the construction business. Construction accounting is a subset of project accounting, and Generally Accepted Accounting Principles (GAAP) still apply to those who must comply with those standards.

Different than the completed contract approach, the percentage of completion method allows revenue to be recognized periodically over the lifespan of a project. With this method, construction contractors can gain real-time understanding of a project’s profitability because of insight into periodic costs and revenue. Still, the end result can turn out very different from initial project estimates, which can impact client satisfaction. Construction accounting is a specialized form of accounting that reflects the unique characteristics of the construction business.

Run Payroll

Even better, clients are more likely to trust businesses that use construction accounting software over manual methods because accounting software provides a safe, convenient way for them to pay online. Your company may manage short- and long-term contracts, often with varying end dates. To stay on top of cash flow and keep your books in check, you will need a flexible yet organized construction accounting system. Sync payroll with your construction accounting software, so you can auto-pay contractors and employees. Sage Accounting doesn’t come with some of the features that large corporations might need, but it’s set up for smaller businesses.

Accounting standards bodies and the IRS have responded with many optional methods for construction industry accounting. A recently introduced GAAP revenue recognition standard, Accounting Standards Code 606 affects how contractors should recognize revenue for long-term contracts using PCM. ASC guidance is that companies should recognize revenue based on performance obligations, which are promises to deliver distinct goods or services to a customer. A contract may include a single performance obligation, or it may include several.

The Advantages of Using One of the Best Construction Accounting Software Programs

Also, there’s a big difference between how independent contractors and employees are treated for tax purposes. Your construction company must pay social security tax, workers’ compensation, federal unemployment tax, and perhaps other local tax on the wages of employees. However, when you pay independent contractors, you don’t have to worry about those expenses. Prior to the implementation of ASC 606, Revenue Recognition, construction companies had different options to recognize revenue and accounting principles. With ASC 606, all industries and companies must use the same accounting principles to recognize revenue. Dawn Killough is a construction writer with over 20 years of experience with construction payments, from the perspectives of subcontractors and general contractors.

Typically, this will be useful if they aren’t able to estimate the unit production for the project with a lot of certainty. Unit-price billing is especially common among heavy-highway and utility construction companies. Under the completed contract method, contract revenue recognition doesn’t occur until the project is complete.