Accounting is a significant aspect of administration and management in business. It is essential to have an accounting team accurately track the transfer of assets into and out of an organization that comprises numerous moving parts. This will ensure both profitability and transparency. When it comes to finances, contractors and firms related to the construction industry encounter distinctive challenges. This article will take a look at the challenges and determine what differentiates construction accounting from regular practices to help you manage your finances in a way that suits your business.
What is different about construction accounting?
It is necessary to realize that construction accounting is not the same as regular accounting. A usual business, such as a grocery store or restaurant, utilizes the ordinary principles of accounting. They work flawlessly for firms like these as it involves selling from a fixed position. The business recognizes the cost of every item sold, and any expenses/overhead are somewhat constant. However, when it comes to construction, the company is mobile and involves customized work in a different location daily.
For this reason, it is required for construction companies to monitor completely different cost categories: mobilization costs like equipment and packing tools, travel time, material delivery to the job location, and also removing any excess materials from the job site once the work is done. In a way, construction business does not have any fixed location, and it requires moving to wherever needed by the customer, including the materials essential for the job. The Percentage of Completion Method is also utilized by construction businesses, which considers revenue based on the contract’s estimated profit and the completed percentage of the project. Thus, it is even more critical for construction companies to make use of cost-accounting methods that would track expenses accurately to calculate profit and loss precisely.
Significant Differences between Construction and Regular Accounting
- Sales: Typical accounting involves taking sales into account, and the services and products offered by regular accounting can be classified into one to five categories. Whereas, a wide range of service categories are provided by construction businesses such as consulting, service work, labor, engineering, physical products, design, and materials.
- Cost of Goods Sold: Regular accounting involves simply recording the cost of the sold product. However, in the construction business, it is not that simple. Every job involves direct and indirect costs that are further divided into various categories.
- Expenses/Overhead: Expenses and Cost of Goods Sold are distinguishable when it comes to regular business accounting. However, this is not the same when it comes to construction. A lot of items that would be considered “Overhead” when accounting, for instance, a grocery store, maybe categorized as “Cost of Goods Sold,” but when it comes to construction accounting, they may be connected to the client’s project director.
- Break-Even: It is easier to calculate break-even points in regular business accounting due to the direct relationship between expenses and income. However, when it comes to construction, it can get difficult to determine the break-even on a project as there is a wide range of item categories. Moreover, the majority of the projects are exclusive customized jobs, with specific detailed requirements and a variety of costs associated with them.
Accounting for a construction business is significantly more complicated as compared to other regular businesses. It is essential to be able to track, record, and classify costs and expenses in construction business accounting to understand bidding on projects, determine profitable projects for the business, bill clients fairly and accurately, and make most of your firm’s resources.
Improving the accounting of your construction business begins with understanding the various costs you can face on a specific project. After that, it is essential to effectively categorize these costs, taking into account the nuances between the cost of goods sold and expenses.
One of the best ways to make sure the accounting is accurate is by implementing a software solution that enables your employees to effortlessly provide data related to cost from a platform integrated with the software you use for accounting.
This can not only save a significant amount of time but will also ensure that your relevant data never gets lost, which will, in turn, make your business more profitable.
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