Managing crews and projects is certainly an integral part of running a successful construction company, but it takes more than that to stay ahead of the competition. Financial management is equally important (if not more) for long-term growth and stability. That’s where highly focused accounting for a construction company can be invaluable. The financial environment of the construction industry presents unique challenges, including tracking job costs and managing seasonal cash flow. Without clear accounting processes, it is challenging to maintain both profitability and compliance. By following proven best practices, construction companies can strengthen their financial foundation and make more informed business decisions.
Understanding the Unique Challenges of Accounting for a Construction Company
In many industries, income and expenses are typically straightforward. That’s simply not the case with construction businesses. Projects can span months or years. Costs vary significantly depending on labor, materials, or subcontractors. Revenue may be received in installments tied to project milestones, rather than a single payment. And change orders can potentially put financial tracking in a tailspin if you don’t have the right accounting crew. These factors make it essential to utilize specialized accounting tools designed specifically for construction companies and their unique work requirements.
How Job Costing Improves Profitability for Construction Companies
Job costing is one of the most important factors in accounting for a construction company. This method assigns costs to individual projects, allowing you to measure profitability on a job-by-job basis.
Accurate job costing involves tracking:
- Direct costs: Materials, labor, and subcontractor payments.
- Indirect costs: Equipment depreciation, insurance, and utilities.
- Overhead allocations that impact each project’s bottom line.
Monitoring job costs in real time means construction managers can spot budget overruns early and adjust before profits are lost.
Choosing the Best Revenue Recognition Method for Construction Projects
Construction company accounting often uses either the percentage-of-completion method or the completed-contract method to recognize revenue. The right choice depends on the size, duration, and nature of the projects.
- Percentage-of-completion: Records revenue and expenses as a project progresses, making it easier to match income with the work completed.
- Completed-contract: Waits until a project is finished to record all revenue and expenses, which can simplify accounting for shorter or less predictable jobs.
Working with an accountant for construction company issues like this can help ensure your revenue recognition method aligns with both industry standards and tax requirements.
Cash Flow Management Strategies for Construction Businesses
Construction work often follows seasonal patterns, which can make cash flow unpredictable. Delays in payments from clients or unexpected expenses can quickly cause financial strain.
To maintain healthy cash flow:
- Forecast revenue and expenses for the year to anticipate slow periods.
- Maintain a reserve fund to cover payroll and essential expenses during downturns.
- Negotiate payment terms that align with project timelines, such as progress billing.
Regular cash flow analysis ensures you can meet obligations and avoid costly short-term borrowing.
Benefits of Using Construction-Specific Accounting Software
Generic accounting software may not be enough for construction companies. Specialized platforms integrate job costing, payroll, invoicing, and reporting into one system. This helps reduce manual errors and provides real-time financial data for better decision-making.
Look for software that offers:
- Integration with project management tools.
- Customizable reporting by job or client.
- Cloud-based access for teams in the office and in the field.
Tracking Change Orders to Protect Construction Project Margins
Change orders are common in construction, but they can disrupt budgets if not tracked carefully. Accounting services for construction ensure every change to a project’s scope is documented, priced, and approved before work begins.
Accounting for change orders ensures:
- Updated project budgets reflect new costs.
- Billing includes all additional work performed.
- Profit margins are protected from scope creep.
A strong process for handling change orders prevents disputes and ensures accurate financial records.
Key Financial Metrics Every Construction Company Should Monitor
Beyond basic profit and loss statements, construction companies should regularly review key performance indicators (KPIs) to assess their financial health and performance.
Important KPIs include:
- Gross profit margin: Shows profitability after direct costs.
- Overhead percentage: Measures how much revenue is spent on administrative and indirect costs.
- Days sales outstanding (DSO): Tracks how quickly you collect payment after invoicing.
Consistent monitoring of these metrics helps identify trends and areas for improvement.
Why Partnering with an Expert in Accounting for Construction Companies Matters
Even the most organized businesses can benefit from outsourced accounting for construction companies. Outsourcing is a way to access specialized professional help tailored to your business needs. Interim, part-time, or on-demand (also known as fractional accounting services) on an outsourced basis can provide the following, and much more:
- Tax planning and compliance.
- Setting up accounting systems tailored to your business.
- Providing strategic advice on project bids and profitability.
Working with an expert team or outsourcing a construction CFO allows owners to focus on operations while ensuring their financial processes meet industry standards.
FAQs About Accounting for Construction Companies
How often should a construction company review its financial statements?
Most construction companies benefit from reviewing their financial statements on a monthly basis. This allows you to track progress, identify cost overruns early, and make informed decisions before small issues become larger problems.
What is the difference between accounting for a construction company and regular accounting?
Accounting for a construction company requires employing specialized experts who have a deep understanding of the construction industry. They need to be familiar with construction-related accounting methods, such as job costing and percentage-of-completion revenue recognition, to account for long-term, project-based work. Regular accounting often tracks income and expenses without the same project-specific focus.
Can accounting for construction companies help with securing financing?
Yes. Lenders often require detailed, GAAP-compliant financial statements before approving loans. Well-maintained construction accounting records can demonstrate stability, profitability, and reliability to potential lenders or investors, thereby enhancing the project’s credibility.
Do small construction companies need a dedicated accounting team?
Even small firms can benefit from professional accounting support. Outsourcing to an experienced team, such as TGG Accounting, provides access to accounting for a construction company on multiple levels (including CFO, Controller, and staff accountants) without the cost of hiring full-time employees.
How can better accounting improve project bidding?
Accurate historical job costing helps you create more precise bids. When you know the true cost of labor, materials, and overhead from past projects, you can price future bids competitively while protecting your profit margins.
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Matt Garrett is the Founder and Chief Executive Officer of TGG. He is a regular speaker across the country on behalf of Vistage educating business owners on the need for sound financial practices, and is Vice President of the Board of Directors of FINACA. Under Matt’s leadership, TGG has received the following recognition: INC. 5000 top companies in the U.S. five years in a row; one of “San Diego’s Fastest Growing Companies” the past four years; and is among San Diego’s “Best Places to Work.”