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The Basics of Construction Accounting Part 3

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Tracking expenses is only one aspect of construction accounting. Tracking income and payments is just as important for ensuring that your company avoids bankruptcy and remains profitable. Below, we will discuss income recognition and retainage laws. Understanding these concepts is crucial for contractors that want to ensure that they are being paid for the materials and services they are providing. Even with accounting teams tracking every penny spent on a project, payment disputes are common in this industry. For assistance with drafting a demand letter or filing a mechanic’s lien, consult with a Florida contractor lawyer at Cotney Construction Law. 

How to Track Income 

If job costing is a way for construction companies to track project costs, income recognition is a way for companies to confirm profits. Income recognition is difficult in the construction industry. Payment depends on what is stipulated in contracts and is often retained (as we’ll see below). Contractors need a way to accurately track income when a task, its expense, and its corresponding payment can occur at separate times. While there are other methods for determining income recognition, for the purposes of this article, we will discuss the method that is the standard for all public, private, and non-profit companies: Accounting Standards Codification (ASC) 606

ASC 606 focuses on when control of a product or service is transferred to a customer. This moment of transfer is simple when you’re selling a slice of pizza. It’s much more difficult to determine when working on a construction project. For this reason, owners and contractors must determine ahead of time when this moment of transfer occurs. When this moment occurs will have a profound impact on how much power contractors have in securing payment. For assistance with remaining compliant with ASC 606 and drafting contracts that make it clear when payments will be received, consult with a Florida contractor lawyer from Cotney Construction Law. 

Construction Contracts and Retainage 

As we’ve covered in previous articles, retainage is the portion of the total payment amount that owners are permitted to hold onto until project completion. Because retainage is income that a contractor does not yet have a right to, it is generally tracked separately from other payments. In the State of Florida, the maximum retainage that can be withheld on public projects is 10 percent of the contract amount. However, there are no Florida statutes that regulate retainage amounts on private construction projects. For this reason, it is imperative that you have your contracts drafted by one of the Florida contractor lawyers from Cotney Construction Law to ensure that retainage is fair and paid upon project completion. 

We will conclude our article in part four with a comprehensive report covering important billing and payroll information. 

If you would like to speak with one of our Florida contractor 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.