Accounting for general contractors

Construction-based businesses follow accounting rules that are different from product/merchandise-based or service-based businesses. General contractors need to make entries of all the transactions associated with a construction project. These are labor costs, revenue recognition using the Percentage of Completion Method (in relation to a project), vehicle costs, vendor payment, invoicing etc. Many accounting terms specific to the jargon of a construction business are commonly used. Some examples are ‘draw’, ‘progress billing’, ‘job costing’, ‘contract retainage’ etc. Let us see what does accounting for general contractors entail.

Why is Construction Accounting Different from general accounting?

Bookkeeping for construction businesses is different because of the nature of work. Unlike a manufacturing unit or a service business like a tow truck, each contract has unique requirements to fulfill.

Utilization of Resources 

With multiple contracts running, there might be a lot of differentiating factors between the projects. These could be the availability of labor, cost of materials, legislation, site conditions, conveyance etc.

With manufacturers or service providers, a single rate persists across a production unit or a serviceable item. On the other hand, general contractors need to acquire the skill of intelligent cost prediction because bidding is an integral part of a tender call. There is no single rate for every project.

Mobilization Costs 

All businesses must take care of upfront expenditures. However, with a construction business, these expenses stretch far and wide. Mobilization costs include administrative, construction and reinstallation (in case the same project ensues after a gap) costs. These cost heads are subdivided into countless categories depending on the type of construction.

In short, the upfront cost is extensive and complex for contractors. There are still basic expenses such as bookkeeping, insurance, and labor costs. Construction accounting necessitates the proper scheduling of these costs into itemized bills.

Long Payment Terms

Long production cycles mean long payment terms. It is unlike a deal being closed and paid for at the end of a sale. For long-term projects, the payment terms are extended between sixty and ninety days or more if not less. Project disputes can withhold payments for even longer. Therefore, construction accounting necessitates revenue recognition.

Here are some concepts that form the basis of construction accounting.

Job Costing – This the methodology used in recording the costs of a project. It entails the association of a project manager or an accountant who is responsible for keeping a track of all the costs relevant to the operations of the contracts.

Contract Revenue Recognition – The generation of revenue in the construction business follows extended payment terms. In most cases, there is a wide time gap between the completion of a project and the income generated from it. Various methods are used to determine when an income is to be recorded in relation to expenses and other liabilities. This is called income recognition in construction accounting parlance.

Contract Retainage – At times, the owner of the project may withhold payments until the contract is completed. This amount needs to be predetermined before the project kicks off. In most cases, 5 – 10% of the contract value is kept aside as the contract retainage amount.

Specialized Construction Billing – The billing style vary across different projects. For example, the threshold for increments in a schedule of values document may be different from one project to another. Construction accounting involves the tracking of all

these specialized billings.

Construction Payroll – Like billings, the payroll structure also depends on many variables such as profit centers, decentralized production, compliance requirements, prevailing wage requirements in multiple localities etc. So again, proper tracking is a prerequisite.

Compliance Reporting – Finally, contractors must generate reports associated with workers’ compensation, new hires, equal employment opportunity etc. Thus, construction accounting must make sure it records data that satisfy the standard national protocol.

An accounting software dedicated to construction handling exists to simplify processes. By entering project details in real-time, contractors or accounting professionals in the field can optimize and automate a significant portion of revenue recognition. A standard software solution for construction accounting let’s one:

1.    Track job costs in real-time

2.    Manage equipment, orders, and subcontract

3.    Manage Inventory

4.    Manage Contract Change Order to automatically update subcontracts and billing based on new modifications and avoid duplicate entries

5.    Generate reports pertaining to assets, revenue, costs, invoices and several other aspects of a project