{"id":3779,"date":"2023-05-12T16:32:28","date_gmt":"2023-05-12T21:32:28","guid":{"rendered":"https:\/\/www.northone.com\/blog\/?p=3779"},"modified":"2025-02-20T16:18:57","modified_gmt":"2025-02-20T21:18:57","slug":"construction-accounting","status":"publish","type":"post","link":"https:\/\/www.northone.com\/blog\/construction\/construction-accounting","title":{"rendered":"Construction Accounting: Complete Guide for 2025"},"content":{"rendered":"\n

Construction accounting is a critical part of any building project, and the key to ensuring it stays on-time and under-budget. What many don\u2019t realize, however, is that there\u2019s a lot more to construction accounting than meets the eye. This is a special category of accounting that factors in the many quirks of construction: from long-term contracts and deposits to project-based accounting and progress billing.<\/p>\n\n\n\n

Construction accounting can be confusing even if you\u2019re familiar with general accounting practices. The larger the project becomes, the more complex its financial considerations become. It\u2019s easy to get lost in all the cost considerations\u2014even when things go according to plan!<\/p>\n\n\n\n

If you\u2019re interested in delving deeper into the nuances of construction accounting, here\u2019s a guide to get you started\u2014from a small business banking app that understands what it takes<\/a>.<\/p>\n\n\n\n

<\/span>What is construction accounting?<\/strong><\/span><\/h2>\n\n\n\n

Construction accounting allows contractors to manage their financial records, cash flow, project progress, and compliance by tracking payments, expenses, and payroll. The goal is to know exactly where your funds are at any given time, so you have a clear snapshot of your business\u2019s finances.<\/p>\n\n\n\n

Like traditional accounting, construction accounting follows Generally Accepted Account Principles (GAAP). Transactions are recorded with the double-entry method. Although you might be able to manually track these transactions at first, as your company grows, you\u2019ll almost certainly need to use accounting software, like QuickBooks. This helps reduce human error and can automate or streamline your accounting duties.<\/p>\n\n\n\n

<\/span>How construction accounting differs from traditional accounting<\/strong><\/span><\/h2>\n\n\n\n

Construction accounting might bear a lot of similarities to traditional accounting, but there are many differences. In addition to accounts payable, accounts receivable, and payroll, construction contractors also need to deal with customer deposits, job costing, progress billings, change orders, and more.<\/p>\n\n\n\n

Construction accounting is primarily project-based and decentralized. Because construction doesn\u2019t offer the same kind of stability and predictability as other kinds of businesses, each project is treated as a short-term profit generator. Most construction projects have very different requirements, from subcontractor availability to building codes to material costs. The only way that construction contractors can make educated bids is to track and control their costs on a case-by-case basis.<\/p>\n\n\n\n

Long-term contracts are a key feature of construction accounting. Most construction contracts are longer than your typical business contract. Deposits and payments are made over time, and companies may allow up to 90 days to pay invoices\u2014and if there are disputes about payment, revenue can be delayed. Therefore, construction contractors have significant barriers to accurate tracking and reporting, not to mention a steady cash flow. Construction accounting aims to reduce those barriers and better predict cash flow.<\/p>\n\n\n\n

<\/span>Key construction accounting concepts<\/strong><\/span><\/h2>\n\n\n\n

<\/span>Job costing<\/strong><\/span><\/h3>\n\n\n\n

In traditional accounting, your general ledger gives you a snapshot of all your transactions and overall financial health. In construction accounting, however, those project-based and decentralized expenses need to be reported for each specific job. This is called job costing\u2014think of it as financial information for each specific job\u2019s costs and income.<\/p>\n\n\n\n

Job costing and the general ledger work together: the general ledger provides an overall perspective, while job costing evaluates specific projects. Similarly, general ledgers have accounts for expenses or accounts payable, and job costing includes specific projects, cost activities (such as installing ductwork), and cost types (labor, materials, administration, and more).<\/p>\n\n\n\n

Organizing this data allows contractors and project managers to oversee the costs associated with specific projects as they are incurred. This level of scrutiny is important because construction operates on extremely tight margins\u2014you don\u2019t want to underestimate and underbid or it will cut into your already-narrow profit margins.<\/p>\n\n\n\n

Generally, job costing measures hours of labor, costs, and how much of the project has been physically completed. Expenses are categorized by codes, from materials to labor. Some contractors subcategorize by project phases or smaller portions of the job. Ultimately, as each job is tracked, recorded, and completed, contractors have an extremely detailed description of their expenses for each project. This allows them to make more accurate bids while remaining competitive.<\/p>\n\n\n\n

<\/span>Revenue recognition<\/strong><\/span><\/h3>\n\n\n\n

Revenue recognition is also known as income recognition. This is how you can tell when you\u2019ve officially started making a profit on a project, and when expenses should be recorded. Because construction involves long-term contracts, typically with delayed payments, revenue recognition helps contractors decide when their income and expenses should be officially recorded.<\/p>\n\n\n\n

There are three main ways to do this: the cash method, completed contract method, and percentage of completion method.<\/p>\n\n\n\n