Construction Accounting Guide
Written by Eriona Bajrakurtaj, ACCA ACPA MSc LLM
There are many tasks in the construction sector that few people have time to take special care and consideration. Construction accounting stands out the most in this instance. The framework of a construction business is typically scattered, the site managers are unlikely to hire individuals whose responsibilities aren’t to work on a construction site.
In most cases, the project workforce will only include contractors. Contractors will be dealing with several projects at the same time, which limits their ability to take care of administrative tasks such as payroll, maintaining accounts of construction projects as well as other related responsibilities.
This is why employing a construction accountant is ideal, as their focus is on managing the cost & profitability of individual construction projects which requires experience & specialist accounting skills. Taking control of the accounts for your construction business is vital for the long-term future of a business.
Within this article, we will cover the following:
- Why is Construction Accounting Different?
- Construction vs Regular Accounting
- Construction Accounting Best Practices
Why is Construction Accounting Different?
The construction industry is notoriously different compared to other businesses. This includes but is not limited to the nature of the work, project-specific pricing, operating costs & expenses, and various other aspects of construction projects. We delve deeper into the specific differences below:
Nature of the Work
Construction projects are unlikely to ever be the same. It involves diverse tasks from building new structures to renovating existing ones, they include a range of different activities that need to be properly tracked & the materials are available. Each task carries its own set of expenditures, timeframes and resources which demand adequate observation & time.
Job Costing
This was alluded to in the previous heading, but every project is likely to require different funding & resources. Every construction project is like a mini business. It’s important to know the cost of each project and how much money is going in and out.
Costs are divided into three categories: money spent on workers, cost of materials, and other expenses. Job costing will finance every stage of a construction project from start to finish. As a construction accountant, it’s crucial to know the outgoings for each project to ensure everything is going according to plan. Contractors use this information to figure out how much to charge the customers.
Operating Costs & Expenses
Operating costs in construction projects can change based on a variety of factors. One that stands out is the cost of materials. Material costs can increase because of marketing demand, supply chain problems and potential geopolitical factors. Construction accountants have to deal with these variables, creating financial strategies to deal with those scenarios.
Also, contractors getting paid for their work can change, with the cost of living making it harder for these individuals to make a living. A construction accountant will have to be aware of wages going up, making it more difficult to find skilled workers for a construction project.
This can have a dramatic effect on the ongoing construction projects, therefore, construction accountants will have to be smart in how they manage money so that this business is successful and becomes profitable. These are some of the main factors as to why construction accounting is different from any other industry. Contact us today to schedule a consultation.
Construction Accounting vs Regular Accounting
Construction Accounting follows similar principles as accounting in general, however, construction accounting has individual challenges which can’t be compared. Construction companies aim to make money on every project, knowing the ins and outs of the costs for each project.
Getting the numbers right is vitally important because each project is unique in its own way. A construction accountant will have to deal with this situation to ensure the numbers are right at all times. Below, we will have highlighted the main difference between construction accounting and regular accounting.
Project Based
Construction accounting revolves around unique projects, with each one’s goal being to make money and grow a business. The industry is very competitive which makes it more difficult for a contractor to come up with quotes for projects to make the company more profitable. Factors that need to be considered include the cost of workforce & material costs.
It’s not uncommon for contractors to be using materials for other projects, to keep costs down but this also needs to be factored in so that each project can be finished to the satisfaction of customers. Ultimately, construction accounting can be quite taxing, and there are various factors that can impact a construction business’ profitability.
Predicting Profitability
Another difference from standard accounting is that construction projects make money trickier, because of the previous factors we mentioned earlier. Each project has its own set of challenges, with unexpected costs rising during the project. It makes it very challenging for contractors to create a quote for a project without the support of a construction accountant. Hiring a construction accountant can take the stress away, they can help to figure out if projects will end up making money, break even or potentially lose money.
Long Term Projects
Big projects can take a long time to be completed and for good reason. Customers will be putting a lot of money into the faith of construction businesses.
Nevertheless, issues that can increase the duration of a construction project include running out of materials, bad weather & potentially the cost of the workforce. Contractors need to manage the money coming and will get paid from the customer in instalments throughout the project. Albeit, this will depend on the stage of the project.
Construction work is seasonal, which makes it difficult to know when a big project will come up next. Construction businesses have to be agile in managing their finances in case of down periods that can crop up during the year.
Limited Sales
Construction companies will often have a limited number of projects. This is mainly due to the size of these projects. Projects for office buildings and government structures will take longer to complete, but the financial gain will be vital for the growth of a company. A construction accountant’s role will be important with long-term projects as we previously mentioned, making sure the staff are fully paid each month.
Construction Accounting Best Practices
Detail, Detail, Detail
Construction accounting in the UK is governed under the Construction Industry Scheme (CIS). This scheme encourages contractors to collect taxes from their subcontractors on behalf of the government. A construction accountant will be your go to expert to make sure your business is compliant with the terms and conditions of the CIS scheme.
Integrate Construction Accounting into Your Workflow
Construction accounting is all about consistency. You need to be using the latest accounting software to help submit your tax records. A construction company will need to update the software with expense reviews, cashflow updates, employee details & invoices of projects.
A best practice to manage this is to ask your construction accountant to update this weekly. By doing this, you will avoid missed expenses and minimise the risk. Majors has specialised accounting software that will help construction companies manage complex data and reporting requirements associated with construction projects. Using this software, you can send invoices, record material costs, and track expenses. This is crucial for the long term growth of your construction business.
Avoid the Cash Flow Pitfall
Construction accounting comes with its own risks, which is the same for other industries too. Here is a scenario for you to contemplate. A client wants to build a new building but halfway through the project, the client runs out of money. As a construction company, you might only get a small part of the total fee which has been spent on existing materials.
If your business isn’t prepared for a situation similar to this, then this will impact the long-term growth of the business. It’s integral that construction businesses maintain a consistent flow of cash, take on projects that are feasible and have confidence that the client can meet payments regularly.
Top Tip: Regularly invoice the client & secure payments upfront for material costs & paying your workforce.
Build your Construction Business for the Future
Having a strong foundation will help with the stability of your business. This is where employing a construction accountant will be important. They will keep you on track and take care of everything for you. At Majors, we have a team of experienced construction accountants who are experts in dealing with the challenges of the construction industry. We will take care of the numbers whilst your workforce goes out to finish each project to the best of their ability.
Contact us today to discuss how our construction accounting services can help to grow your business.