All About Construction Accounting

All About Construction Accounting

Accounting is a very important aspect that needs to be considered carefully for a successful business venture. Every business big or small or from any industry requires proper maintenance of the accounts to identify the expenses and helps in making better decisions for the business growth. However, when we speak of accounting in general and Construction Accounting, there are certain differences between them both that need to be respected and considered while maintaining the finance books.

Unlike other businesses, construction is an unconventional business with a unique business structure and so understanding and controlling the construction financial management is crucial for a healthy and growing business. Construction accounting is basically a project-based model where the expenses and the revenue management are different than standard bookkeeping. However, the first step toward properly managed accounts is the hiring of an accountant who can help in keeping the financial tabs. Suppose you are a constructing business in Surrey, Accountant will help to manage the accounts based on the state accounting policy.

Why is constructing accounting different?

There are several parameters that make constructing accounting different from the usual accounting system. The characteristics that make the accounting for construction business different are:

  • The financial management of a construction business is tricky as accounting follows a project-based model. The construction firms usually work project to project and sometimes they also work on more than one project at the same time with each project with different in its planning and execution. So, in such cases, the expenses and the timelines can be quite unpredictable and erratic and so every project requires its own set of accounting to evaluate the profit and loss.
  • The payroll of the construction firms is also quite varying as they not only pay the direct employees but also have transactions with various contractors for the project requirements. Besides, with varying working hours and different job requirements, they have varied week-to-week expenses.
  • Moreover, in contrast to other businesses, the construction business has an extensive gamut of services to take care of. Their services can range from interior refinishing to constructing an entire building and so tracking their expenses and evaluating the profit is not an easy task.

These specifications of a construction business make the accounting tricking and difficult to sort and this is where it is different from the standard bookkeeping. Now, that we have been able to trace the difference in the expenses criteria, let us now find out what makes for a successful accounting in a construction business. There are three facets of construction accounting based on which the expenses and revenue are tallied to find the profit or loss of the construction firm.

  • Finance Management: On a project-based model, the cash flow is not always predictable and so the expenditures and incomes need to be tracked by projects. Tracking the financial numbers is important to create valid estimates and timelines for projects. The most effective financial management will require regular financial monitoring and reports should be kept up to date.
  • The finance management would require to regularly keep tabs on the account payable and the account receivable reports. Keeping a check on these reports helps in understanding the current financial standing of a firm and also helps in the business growth.
  • Maintaining a general ledger for day-to-day transactions is instrumental in helping to prepare financial reports and documentation.
  • Job costing is an important instrument that helps in recording, tracking, and organizing the transactions for every individual job. A job costing report can also help in creating estimates for upcoming projects and essential business growth strategies.
  •  Project Management: Project management is an important part of the construction business as project-related changes are quite frequent in construction and so managing these changes and maintaining them is very essential for the overall finance of a project. Changes in project planning can eventually pose any number of financial challenges, so the knowledge of the following accounting concepts can help in anticipating and acknowledging the challenges.

Incorporating the “change clause” in the agreement can help in evaluating the challenges that can pose for a change and how to address it. A change clause would include all relevant information on when either party can opt for a change and how to report and manage the change.

Although the “change clause” can be able to anticipate some of the changes that can come up in the course of the project but it is impossible to foresee all of them. And in case of such unforeseen changes what is essential is to make an amendment in the contract as a “change order” when agreed upon a certain change. It is also important to add as many details of the change as possible to keep the track of the same in the project.

  • Compliance: Every government has certain mandates that specify the management of the finances in the construction industry. For the business to thrive it is essential to comply with government-specified financial practices. For example, if you are a construction firm in Surrey, Accountant will have to maintain the accounting books in compliance with the government standards.

Final Word: By gathering the knowledge of Construction Accounting, you can manage your financial books based on the theories on the construction business and stay on top of the finances and be able to grow and unlock more perspectives. For any business to grow and survive it is essential to have a clean accounting book which will help in understanding the cash flow and the expenses that will help in making better decisions in the future.