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Accounting for Construction Industry

Accounting for the construction industry is different from that in other industries. A normal industry follows stereotypical accounting methods and they work for them, but when it comes to constructing industry, the scenario is vividly different.

In the construction business, people work at new locations, and work done is quite different in nature, for regular terms. There are different factors that affect cost in the construction business like travel time, packing of tools and equipment, and delivery of materials at the job sites, which are all variable in nature.

In a construction business, the method of accounting counts revenue on the base of the profit estimation and what percentage of the project is completed, this is known as the Percentage of completion method. So overall accounting for construction business is quite complex and unique, also because it has to accurately track all the expenses, costs, and income for all the different job sites.

How does Construction Accounting differ from general accounting?

Categorization of sales: Unlike the regular business, the construction business stands for a wide range of selling products like engineering, coasting, labor, designs, service provided, etc.

Expense calculation: In a typical business, the expenses are mostly pre-decided or can be predicted but in a construction business, this is never the case. Even the categorization of the goods sold is differently Accounted for in Construction Business.

Knowing the break-even point: break-even point can be achieved by the balancing relation of income and expenses, but in the construction business, it’s very complex as there are already too many categories of items that make it hard to comprehend.

How can Meru Accounting help you with that?

We at Meru Accounting have specialization in Accounting for Construction Industry, house flipping business, and turnkey project accounting. We understand the different requirements that a construction business needs.

Xero Addon for Construction Industry: Workflow Max Benefits

• We can have separate projects in Workflow max.
• We can have various tasks in that.
• In each task, we can assign the Cost and Profit.
• We can assign tasks to each of the team members.
• It automatically creates invoices in a single click.
• We can convert the cost of WIP into the Sales Invoice automatically.
• We can have the Budgeted Cash flow automatically from Xero.
• It can automatically convert purchase orders to a bill in Xero instead of Duplicate Data entry.
• We can assign margins in the% form of the cost.
• We will be able to have Tracking of Profits for individual projects in Workflow Max.
• You will have all the project’s performance on your Dashboard of Workflow max.

Unique Challenges of Construction Accounting

Accountant faces various challenges in performing accounting procedures. Such challenges arise due to the uniqueness of the industry. Experienced professionals and software such as Xero etc. can assist you in tackling issues the following issues:

Inaccurate Cost Estimates

In the construction business, multiple projects are simultaneously working at one go and are usually for a longer duration which may underestimate the project cost. The project may end up with additional use of material or equipment that increases the project cost, but a big blow is the labor cost. Imagine just a delay of a week or month in your budget or estimated time frame can cost huge in covering the additional labor cost.

Fluctuating overhead estimates

There is an overhead cost that covers a significant portion of the construction project cost. Overhead costs include office costs, space rental, equipment, and labor also. The needs of the construction vary from time to time and from job to job, it may need different things at different time frames, so it becomes difficult to have a vivid picture of the overall overhead cost. An accurate and efficient estimate at place cannot be done without determining the profit of your business.

Cost-recognition problems

A construction company recognizes revenue on the completion of the project, but the expenses are recurring throughout the project. It creates confusion about the profitability of the project and also takes a toll on cash flow if not cautious. For example, if you generate a bill on completion of the project, the stacked expenses throughout the project can decrease your cash reserve and end up with the illusion of profit.

Scope creep

Projects usually in the construction business have last-minute changes. Changes like material availability, site condition, additional equipment, etc. can have serious cost implications in the project and change the original plan. Clients may come up with add-on changes known as scope creep that create problems. 

To tackle such issues, the project manager must coordinate with the accounting team to determine if the additional cost is feasible and does not affect profitability. You can make your client happy but at the same time can control costs also.

We track, manage, report and categorize our client’s costs and expenses which ultimately help our clients to know which project to opt for, which bid can be turnout profitable, how to manage the billing procedures, and how to utilize resources to get the maximum return on investments.

We track our clients’ expenses and cost per property being developed by using class tracking or tracking categories in software like Xero, QuickBooks, etc. We also build a dashboard of different categories so that our clients can also track various expenses and costs from different construction sites. That saves the valuable time of our clients and is very easy for them. We do the bookwork so that our clients can focus on their construction fieldwork without any worries.