How To Improve Your Construction Accounting
If you’re in the construction industry, you know that it’s not just about putting on a hard hat and watching the dollars pour in. Your days are spent juggling various tasks such as costing projects, meeting clients, managing teams, chasing payments, ensuring health and safety, and even factoring in the unpredictable weather.
One of the biggest challenges you face is managing your finances effectively. The nature of construction projects is unique and requires a different approach to accounting. It’s where good construction accounting can make a big difference. It’s an essential part of managing your business well and ensuring good cash flow.
What Type Of Accounting Is Used In Construction?
There are two primary accounting methods for construction businesses: the percentage-of-completion method and the completed-contract method.
The percentage-of-completion method
The percentage-of-completion method is generally considered the best accounting method for construction businesses because it provides a more accurate picture of your project’s profitability and financial performance over time. Under this method, revenue and expenses are recognized based on the percentage of completion of a project. This method is particularly useful for large, long-term construction projects that span multiple accounting periods.
The completed-contract method
The completed-contract method, on the other hand, recognizes revenue and expenses only when a project is completed. This method is simpler to implement, but it may not provide an accurate representation of your project’s financial performance until it is completed. This construction accounting method is typically used for smaller, short-term projects.
What Is The Best Accounting Method For Construction?
The percentage-of-completion method is generally considered the best accounting method for construction businesses. But a professional construction accountant can advise you based on the unique needs of your business.
Construction Accounting Best Practices
To ensure accurate financial reporting and effective management of finances, it’s important to follow best practices in construction accounting. These include:
- Using a job costing system to track revenue and expenses for each project.
- Ensuring that all costs are assigned to the correct project and phase.
- Using the percentage of completion method to recognize revenue.
- Ensuring that expenses are recorded in the same period as the revenue they are associated with.
- Reviewing financial reports regularly to ensure accuracy and identify potential issues.
Common Construction Accounting Errors
If you’re doing your own bookkeeping or using an accountant who doesn’t know your industry it’s possible for errors to occur in your construction accounting. These can include:
- Misallocation of costs to the wrong project or phase.
- Incorrect revenue recognition.
- Failure to record all costs associated with a project.
- Failure to record change orders accurately.
How to Improve your Construction Bookkeeping
At Rakow & Co we work with a variety of contractors and we have found that the best way to mitigate risk and improve your construction bookkeeping is to implement a strong control system. This includes:
1. Segregating duties to ensure that no one person has control over all aspects of the accounting process. This is often a function that is best left to a professional bookkeeper.
2. Conducting regular reviews and reconciliations of accounts and financial statements.
3. Implementing a system of checks and balances to ensure accuracy and prevent fraud.
4. Using software with built-in controls to minimize errors and improve efficiency, including cloud-based software to access your financial information from anywhere.
5. Automate as many processes as possible, such as invoicing and payroll.
6. Hire a professional bookkeeper like Rakow & Co that has experience in construction accounting.
What Are The Duties Of A Construction Bookkeeper?
Your construction bookkeeper can help you with:
- Record Keeping: Keeping accurate and up-to-date financial records for your business, including accounts payable and receivable, payroll, and general ledger entries.
- Invoicing: Creating invoices for your clients and tracking payments received.
- Budgeting: Assisting with the creation of your construction budgets and monitoring expenses to ensure they stay within the allocated budget.
- Job Costing: Tracking costs associated with your specific construction projects, including labor, materials, and equipment expenses.
- Banking: Reconciling bank statements, managing cash flow, and processing electronic payments.
- Reporting: Preparing financial reports and statements for management, investors, and other stakeholders, including profit and loss statements, balance sheets, and cash flow projections.
- Compliance: Ensuring compliance with accounting regulations and industry standards, such as Generally Accepted Accounting Principles (GAAP) and Construction Industry Standard
What Reports Can Construction Accountants Provide?
There are several reports that are commonly used in construction accounting. These include:
1. Job cost report: A summary of all costs associated with a specific project. It includes direct costs, indirect costs, and any change orders.
2. Profit and loss statement: Detailing your revenue, expenses, and profitability for a specific period, such as a month or a year.
3. Balance sheet: This report shows the assets, liabilities, and equity of the business at a specific point in time.
4. Cash flow statement: Reflects the inflows and outflows of cash for a specific period.
The Best Construction Accountant Online
In the end, managing accounting in the construction industry can be tough if you don’t have the experience.
With the right software, tools, and construction accountant at your side, you can simplify the process and make better decisions for your business.
At Rakow & Co we can offload the burden of your bookkeeping and help you take your construction business to the next level! Contact us today for a free consultation.
