Phone

The Basics of Construction Accounting Part 1

Proudly Serving Employers

Accounting is necessary for any business that wants to not only function but grow and thrive as well. This is as true for a construction company as it is for any other business. In this four-part article, a Florida construction lawyer from Cotney Construction Law will discuss the basics of construction accounting. As you will see, construction accounting is necessary for companies that want to bid accurately and keep project costs low. Applying these tenets to your construction business will ensure that it is in the best position to succeed when tackling current and future projects. 

What is Accounting? 

Briefly, accounting is the documentation and tracking of business transactions. Any business must have basic accounting in place in order to be able to report income to the Internal Revenue Service (IRS). Accounting is also used for tracking funds as they enter and leave your bank accounts (an incredibly important feature that we will detail further in parts two and three). But accounting goes beyond number tracking. Accounting can reveal trends and allow you to address concerns or capitalize on opportunities that you may have otherwise overlooked. 

How is Accounting Different in the Construction Industry? 

Due to the often turbulent nature of construction, contractors face accounting difficulties that are unique to this industry. Accounting in other industries is relatively simple. For example, the manager of a clothing store that operates out of a single location knows the cost of their merchandise and how to accurately price it for profit. There are fewer variables to worry about with regards to overhead. Simply put, they typically have a strong grasp on how much they’re making. It’s not quite that simple in the construction industry. 

The Importance of Construction Accounting 

The commonality of long-term construction projects means that construction companies are often forced to invest large sums of money into a project in the hopes that it will pay off. Payment disputes are common, and a construction company that goes without payment and fails in accounting will be unable to maintain cash flow from one project to another. 

And because project sites are always in different locations, construction companies have a myriad of additional expenses to keep track of that other businesses don’t have to. Travel time, delivery costs, and material costs are just a few of the expenses that fluctuate throughout a project. For construction companies to succeed, they need to treat each project as a separate source of revenue and accurately track income and expenses. 

For information on job costing, read part two. Read part three for information on income recognition and retainage. We will conclude our series in part four by discussing billing and payroll. 

If you would like to speak with one of our Florida construction lawyers, please contact us today.

Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.