Construction Accounting
Accounting for the Construction Industry
One of the big differences between regular accounting vs. construction accounting is how expenses are categorized. Because construction companies can have multiple contracts at a time, it's important that they can monitor the progress of each project individually.
Rather than lumping together all the equipment, materials, and labor expenses from the whole company, expenses are broken down by project. As bills are paid and income is collected, each transaction is assigned to a particular job number. This makes it easier to view income & expenses from one contract at a time. This can be very helpful because it allows management to track progress in more specific detail.
Imagine a contractor with two ongoing projects. One of them is going to be very profitable, and the other is going to take a small loss. If the company isn't categorizing their expenses by project, those two vastly different contracts would be combined on the books. This makes for a misleading situation, because OVERALL they are still making a profit. However, if managers looked at each contract individually, they'd see that one of them has a big problem.
By looking at individual jobs, a company may find there are some contracts that tend to be more profitbale, while others are kind of risky for them. The details of their accounting reports can help them decide what type of work to accept in the future.
Another key point in construction accounting is tracking expenses by type. In a normal accounting situation you might see something like "office expenses" on the books. That broad category could mean anything from a box of pens to printer ink. That's okay in some situations, but in construction that's not enough detail. With big expenses and big revenue on the line, decision makers need more information.
Construction costs can add up quickly. If they aren't watched closely, the business is in danger of losing profits. This is why they are tracked with precision. Not only is everything tied to a job, but expenses are broken down into main categories. Some of these include:
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Tracking by expense type gives you another method of evaluating the health of your construction company. It's not that different from evaluating a car, if you think about it. You wouldn't just glance at the tires and assume the engine is all right. If you really want to know how your car is doing, you'd want to look at engine oil, compression ratio, fluid levels, air/fuel mixture, etc. The more information, the better. And, just like a car, fixing a problem in a construction company is best done when the problem is still small. The earlier the better; otherwise, it could lead to bigger costs later on.
Many contractors use spreadsheets to track project expenses. This can be effective for small companies, but it has some limitations. Accounting software that's made for the construction industry is better tailored to the work. For example, it can give you automatic status reports for each job.
In A-Systems software, you can import an estimate, which is then used as your budget for a project. All expenses, bills, and receipts that are entered for that job are automatically compared to your budget. This allows you to get up-to-date reports.
The software makes it easy to get real-time reports. These reports can be viewed in the software, or emailed to anyone who needs them.
A-Systems has served the construction industry since 1978, making the first accounting software for contractors. The software continues to progress, as loyal clients offer feature requests and suggestions.
A-Systems software includes all the expected accounting features, like General Ledger, Accounts Payable, Accounts Receivable, and Payroll, but it goes beyond basic accounting. It also has the construction-specific features a contractor needs, like Job Costing, Custom Reporting, Inventory, Purchase Orders, Equipment Costing, and Sales Orders.
Reports are a critical part of operating a construction company. They give valuable information to decision-makers, allowing them to adjust course as necessary.
There are numerous ways to look at accounting details, depending on what information you're looking for. Here are some of the reports you might use:
Construction payroll has a few unique qualities.
Certified Payroll - When working on a government contract, construction companies are required to pay workers a certain wage (or higher). This is called Prevailing Wage, and it is required by the Davis Bacon Act. The Prevailing Wage (aka Davis Bacon Wage) is determined by the U.S. Department of Labor.
If a government contractor does not meet the government's minimum requirement, they can receive a fine. In order to verify compliance, the contractor is required to submit a Certified Payroll report. The report varies from state to state, but it is essentially a report of how much each employee was paid, including any fringe benefits. This report has to be submitted each week, for as long as the project lasts.
(Fringe benefits are extra payments an employee may receive. Perks of the job, so to speak. This might include food money, a clothing stipend, contributions to a 401k, tuition reimburse, etc.
Multiple States - Keeping up with taxes can be tricky enough as it is, but properly withholding taxes for employees in multiple states can get even trickier. There are tax laws that are based on your business location, and there are laws that are based on where you perform your work. That means that being based in, say Colorado, and building a home in Arizona could potentially involved tax laws from both states.
Many states require Multiple Worksite Reporting. This means that if you have a certain number of employees working at a location other than your headquarters, you need to report it using a form from the Dept. of Labor.
Time Sheets - Keeping track of payroll on a construction site can be a challenge. From the office, you don't know when workers are arriving or leaving, when they're taking breaks, or what tasks they're working on. An employee may work on one task on one job site, and then move to a totally different task on a different site. There are time clock apps for construction to streamline that process, and allow each worker to track their own work. The data is then compiled into a digital timesheet and sent back to the office in real-time.
Project-Centered Payroll - In order to track all expenses associated with a particular project, payroll hours need to be tracked by job. This makes it easier to assess costs and calculate profitability.
Payroll can be quite difficult to handle with all the varied tax laws. A good software can help streamline your efforts.
Worker's Compensation is a critical part of construction accounting, as construction jobs tend to have a higher risk for injuries. When an injury occurs on the job, employers may be obligated by law to pay either salary for time lost, or insurance expenses.
Some states require companies to purchase worker's compensation insurance. Other companies choose to buy it so they have money set aside for potential risks. The amount of money an employer pays the insurance company is based on the total wages of all covered employees. This requires each company to clearly track pay for each employee, as well as classify their job type, i.e. office staff, power line worker, etc. This helps the insurance company verify employee risk.
Worker's Comp insurance payments are prepaid, similar to taxes. A company estimates their employee wages, and pays according to their estimate. Insurance companies can audit their clients to compare actual salaries to estimated ones. If an employee's pay increased during the year, the company may be required to pay extra to insurance. Likewise, if the company has overpaid, they may get a refund from insurance, similar to a tax refund.
A company pays worker's compensation money to the U.S. Department of Labor, who then administers it to the affected employee. It can come in the form of salary replacement and medical expenses, but it can also include training to find another job.
When it comes to expenses, you have some options of how you "recognize" them on the books.
The first main method is the Cash Basis. Expenses are recognized in real-time, as they are paid. This is a nice, straightforward approach that can simplify your books. However, you made need a bit more complexity than that.
Some situations call for Accrual Accounting. This is when expenses are recognized in advance. Instead of being recorded when they are paid, they are recorded when they are incurred. For example, if your construction business buys a large load of materials, but payment isn't due for 6 months, you may want to record that now. By keeping track of this upcoming expense, you have a more accurate picture of your financial status, and you won't be surprised when that payment comes due. By accounting for the expense as soon as it's incurred, you can see your profitability (income minus expenses) in advance.
Simple business models can use simple accounting. If you sell piano lessons, you give a lesson and get paid. If, however, you build large industrial buildings, you'll be working on that project for an extended period, and you may want to collect revenue along the way. This method is called Percentage of Competion. It involves breaking up your project over its estimated life. If you are 40% done with the project, you can collect 40% of the revenue. This helps money keep coming in along the way.
The construction industry encompasses a number of business types.
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Any time a contractor helps to build something—especially when there is labor and materials to track—construction accounting is a valuable tool. A company dealing with multiple projects will want to keep their costs separated by contract. This gives them the ability to track progress on individual jobs, which will vary in scale and duration.
Big construction projects are made up of many smaller tasks. In order to keep the project in sync, field reports are prepared each day. These are also called daily construction reports. Here are some of the things that are included in a daily report:
Field reports are not only helpful to help project managers stay up-to-date, they are also helpful for project owners. If there is a delay in construction, you will be able to explain it with specifics. If there is a legal dispute, field reports can document actual incidents for court purposes.
Change orders are changes to a construction contract. Both the contractor and the project owner must agree to any of these amendments, because contracts are legal agreements. These changes can be simple, like changing the type of light fixtures that are used. They can be complex, like moving a bathroom, which will require changes to plumbing, framing, and drywall placement. This is pertinent to accounting because each change order will change the total amount of the contract, and sometimes the length of time used to complete the project.
In order to initiate a change order, the contractor prepares a change order proposal. It details the specific changes, the scope of the work, the time estimated to complete the work, and any changes to costs.
Aside from the construction work, most contractors consider change orders to be one of the most time-consuming tasks they have to deal with. It is important to get it right though, because disputes can arise and potentially end up in court. Making sure that the change order proposals are detailed, estimates are accurate, and cost estimates are reasonable can save contractors a lot of trouble down the road.