What is Construction Accounting?
Construction accounting, as the name suggests, is the accounting process that addresses the unique financial challenges of the construction industry. It focuses on the core needs of the construction sector, such as making a project profitable and ensuring financial compliance. A construction accounting tool includes features like cost estimation, budgeting, expense tracking, and financial reporting.
How is Construction Accounting different from other accounting fields?
A construction company’s accounting process is very different from those of a retailer or manufacturer in 3 ways:
1. Construction accounting varies with every project
Let us understand this with an example! Suppose you open a new branch for your fast-food chain. You will not have to make so many changes. There is no need to change the menu completely (maybe a little alteration based on the geographical location).
The only thing that you will keep your focus on will be training the employees and that’s mostly it. However, with a construction company, the situation is completely different. In the construction industry you need to look at each of your projects as unique.
- First and foremost the location is different.
- Then there is always the question of labor availability
- Also the availability and the cost of raw material in the area (since it is highly expensive to transport everything).
- Along with this there is challenging legal work and challenge to meet up to the standards of local law requirements.
Therefore, calculating everything extensively with zero variance becomes difficult.
2. The construction projects take longer to complete
When you are working on a project that requires an extensive amount of time, it becomes difficult to predict every requirement beforehand.
Along with the risk of sudden calamities, there are many regular risks involved.
Not only this, the cycle of payment in the construction business (30, 60, or 90 days) is also a problem. Since you don’t have a regular cash flow, planning your income and expenses well in advance becomes a necessity. Failing to implement this has serious implications.
3. Construction accrues a lot of mobility cost
As you start working on a new project you have to relocate everything from construction materials to laborers. Thus you spend a lot of money to transportation. You need to track all of these changing costs to ensure that your money is giving you maximum returns.
Step-by-step process to do construction accounting
1. Break down project costs
The construction industry is project-centric. This means that you should categorize all your expenses and incomes project-wise. You should also calculate your job-costing by considering the expenses and revenue generated on each project. This will help you be at ease during tax payments. It will also give you an accurate view of your profitability.
2. Record day-to-day transactions
It is important that you calculate the expenses incurred after each job accurately. As a company this helps you plan a project without losing a lot of money. You can accomplish this if you use construction tools that categorize recurring expenses. Because with this method you can easily retrieve the information at any time.
3. Keep an eye on your business expenses
Generally, your business expenses include employee payroll, equipment costs, legal fees, insurance, marketing, and advertising. Make sure you keep track of all these business expenses. Carry the task out on a spreadsheet or buy an automated expense tracker. Find out what works best for you.
4. Tally Bank and Supplier Statements
It is very crucial that you compare your bank statement with your personal record of income and expenses. This allows you to avoid accounting mishaps.
5. Get access to reliable accounting management software
Traditional methods of bookkeeping have their own limitations: Spreadsheets and readymade templates are not enough to carry out complex transactions.
An accounting management tool loaded with the latest technologies can help you track spending. What this means is that you can create detailed financial reports at closeout, equip employees with real-time accounting data, send invoices, and generate error-free financial reports.
Not sure which accounting or estimation tool to pick? Read our blog on How to pick the best Construction Accounting tool? You can also read about 6 Ways to use Construction Software here.
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If you are looking for a premium accounting management tool that does not burn a lot of your cash. Check out BLDON, a construction-specific accounting management software. Read more about BLDON here.
