Construction Accounting 101 & 8 Options to Choose From
Construction accounting is a specialized form of financial management tailored to the unique complexities of the construction industry. With project-based work, varying costs, and compliance requirements from organizations like the IRS, understanding the nuances of construction accounting is essential for business success. This guide will walk you through the differences, processes, and top software options for construction accounting.
Table of Contents
How is Construction Accounting Different?
Construction accounting differs significantly from traditional accounting due to the industry’s project-based nature and specialized requirements. Here’s what sets it apart:
Numerous Service Categories
Construction businesses often offer multiple services such as residential construction, commercial projects, renovation, and maintenance. Each category can have distinct revenue streams and cost structures, requiring careful tracking to determine profitability for each service.
Cost of Goods Sold (COGS)
COGS represents the direct costs tied to construction projects, such as materials, labor, and subcontractors. Properly identifying and categorizing these costs is crucial to accurately calculating profitability for each project.
COGS vs. Overhead
Unlike COGS, overhead refers to indirect costs like rent, insurance, and utilities. These costs are not directly tied to any project but must be allocated correctly to maintain financial accuracy.
Project-Based Work
Construction accounting revolves around managing multiple ongoing projects, each with unique budgets, timelines, and expenses. This requires meticulous tracking of revenues and expenses for each project rather than the business as a whole.
A Simple, 7-step Construction Accounting Process
Mastering construction accounting involves following a structured process. Here’s a simplified 7-step guide:
Step 1: Decide on an Accounting Method
Choose between cash and accrual accounting.
- Cash Method: Revenues and expenses are recorded when cash is received or paid.
- Accrual Method: Revenues and expenses are recorded when they are earned or incurred, regardless of cash flow.
The IRS often mandates accrual accounting for construction companies exceeding a certain revenue threshold.
Step 2: Get a Business Bank Account and Credit Card
Separating personal and business finances is essential. Open a dedicated business bank account and credit card to ensure clarity and streamline tax reporting.
Step 3: Choose Your Accounting Software
Invest in accounting software that meets the unique needs of construction accounting. Look for features like project tracking, job costing, and integration with payroll systems.
Step 4: Track All Business Transactions
Maintain accurate records of all financial transactions, including receipts, invoices, and bank statements. Use a reliable bookkeeping system to record every expense and revenue item promptly.
Step 5: Prepare to Adjust Journal Entries
At the end of each accounting period, adjust journal entries for depreciation, prepaid expenses, and accrued liabilities. This ensures your books accurately reflect the company’s financial position.
Step 6: Generate Financial Statements
Use your records to create key financial statements, such as:
- Income Statement: Displays revenues and expenses over a period.
- Balance Sheet: Shows assets, liabilities, and equity at a specific point in time.
- Cash Flow Statement: Tracks the inflow and outflow of cash.
Step 7: Take Care of Your Taxes
Stay compliant with IRS guidelines by accurately calculating taxes. Construction companies often deal with unique tax scenarios, including sales tax on materials and payroll taxes for employees.
Top 8 Accounting Software Packages for Construction Companies
Choosing the right accounting software can simplify your financial management. Here are eight excellent options for construction businesses:
My Count Solutions
Best For: Small to medium-sized construction firms
Features:
- Job costing and project tracking
- Payroll integration
- Customizable financial reports
ComputerEase
Best For: Comprehensive construction management
Features:
- Equipment tracking
- Job costing
- Payroll and subcontractor management
Premier
Best For: Growing construction businesses
Features:
- Integrated project management
- Automated financial reporting
- Real-time budgeting tools
ProCore
Best For: Large-scale projects
Features:
- Document management
- Budget tracking
- Real-time collaboration for teams
QuickBooks Online
Best For: Ease of use and flexibility
Features:
- Expense tracking
- Invoicing and payment processing
- Integration with payroll and tax filing
Sage 100 Contractor
Best For: Comprehensive construction accounting
Features:
- Project management tools
- Compliance tracking
- Advanced Reporting
Xero
Best For: Small businesses and startups
Features:
- Affordable pricing
- Cloud-based accessibility
- Integration with third-party apps
Bench
Best For: Bookkeeping services
Features:
- Dedicated bookkeeping team
- Monthly financial reports
- Tax filing support
The Bottom Line
Construction accounting is more than just tracking expenses and revenues; it’s about managing the financial health of your business on a project-by-project basis. You can improve profitability and compliance by understanding its unique requirements and following a structured accounting process. Choosing the right accounting software, tailored to your business needs, can further streamline operations and support growth.
Stay informed and organized, and let tools like My Count Solutions or QuickBooks Online simplify your financial management to focus on what matters—building your business.
