Having a solid accounting firm is essential for any construction business. You can increase your earnings while controlling risk and adhering to legal requirements by selecting a CPA firm with experience in the construction industry.
The different methods of contract revenue recognition can affect a construction company’s financial statements. For example, cash accounting recognizes income only when payments are received and expenses when bills are paid.
Accuracy
A construction accounting firm should provide accurate data, enabling clients to make the best business decisions. This requires excellent document management, a good understanding of basic accounting principles, and a keen eye for detail. It also means using software designed for the industry, such as cost-coding systems and financial automation. In addition, regularly comparing account records with bank statements can help prevent mistakes.
A firm that is accurate in its accounting can improve productivity, help managers better allocate resources, and reduce costs. It can also provide the information needed to meet regulatory and legal requirements. Inaccurate data can hurt business operations and the reputation of the firm. It may even make it difficult to secure financing or investors.
Construction companies typically spend a lot of money on ongoing projects. This requires them to track project costs and revenues carefully, bill clients correctly, and manage cash flow. They must also comply with industry regulations and adhere to specific accounting methods.
Construction firms need to consider overhead costs when bidding on new projects. This is essential to ensure the company can cover operational expenses and staff salaries and remain financially stable during economic volatility. It can also help a construction company identify high-profit potential projects and strategically position itself in the market.
Experience
Maintaining your finances is hard enough for most business owners, but construction companies face unique accounting challenges. Construction accounting firms can help you understand these challenges and provide solutions that help your company run more efficiently.
For example, you may need to implement a system that allows managers to track daily project costs, including labor, materials, and overhead, and compare those costs to budgeted amounts in real time. This can help you identify and address underbilling and cost overruns before negatively impacting profitability. You also need to implement systems that track progress billings, which are payments based on the completion of specific project milestones and cash flow management.
A construction-focused accounting firm can also help you choose the best income tax reporting method for your company. They will understand the pros and cons of different entities and can help you switch to an entity that is more advantageous for your business. They can also advise you on the most beneficial method of recognition for project revenues and expenses, and they can help you avoid mistakes that could result in a costly audit or penalty.
A construction-focused CPA firm can also help you with budgeting, and they will be able to analyze your overhead and help you increase your bid-versus-win ratio. They can also analyze your cost allocations, estimating methods, and job-cost reports to prevent problems that may lead to poor project estimating or an inability to cover operating expenses.
Flexibility
The construction industry is unique because most revenue is generated from projects rather than product sales. To manage this dynamic, construction accounting requires specialized tools and approaches. The most common example is the job cost ledger, which allows construction businesses to record detailed costs for each project. This information can then be analyzed to improve estimates, bids, and profit margins. This cycle is essential for construction firms, which need accurate job cost data to remain competitive.
While standard accounting uses a general ledger to track all income and expenses, construction companies need an additional detail specific to each project. This is why most construction accounting uses the accrual method, which recognizes revenue when earned and expenses when incurred, regardless of when cash payments are received.
Another challenge is that many construction projects involve long-term contracts. This can create difficulties when estimating costs and determining profit margins. It can also lead to cash flow problems if the project is completed on time or the customer is satisfied with the work. To avoid these issues, construction firms must monitor project progress and ensure the customer pays the proper retainage. The company must also closely monitor expenses to meet the contract budget.
Cost
Construction accounting requires more complexity than traditional business accounting because a construction project may span multiple financial periods or years. Due to this, the accrual method of accounting—which records revenue at the time of earning rather than at the time of cash receipt—must be used. This can help avoid costly mistakes like underestimating labor or overestimating materials, leading to lost profits and increased cash flow requirements.
Construction-specific accounting best practices can help you run a more stable business and ensure compliance with industry regulations. A solid system and processes for handling change orders, ensuring that projects are billed by the contract, and tracking retainage and progress payments can prevent customer disputes and reduce risk.
Contractors can also leverage cloud-based financial management solutions to manage their financial data. These software programs can automate and simplify the accounting process, improving accuracy and reducing operational costs. They can also provide real-time visibility into financial performance to help contractors manage cash flows and increase job profitability.
Construction accounting differs from standard business accounting in identifying and tracking project-based, overhead, and profit expenses. A well-designed construction accounting system identifies each job’s direct and indirect costs. It provides a detailed account of ongoing progress on each project, including costs incurred to date and cumulative revenues based on percentage-of-completion or other recognition methods. This information can be used to create regular work-in-progress reports, which can help identify trends such as shrinking gross profit margins (profit fade) and spot underestimating issues early.
