{"id":11364,"date":"2021-08-04T00:00:30","date_gmt":"2021-08-04T04:00:30","guid":{"rendered":"https:\/\/foundationsoft.com\/?p=11364"},"modified":"2025-05-15T10:57:26","modified_gmt":"2025-05-15T14:57:26","slug":"construction-accounting-101","status":"publish","type":"post","link":"https:\/\/www.foundationsoft.com\/learn\/construction-accounting-101\/","title":{"rendered":"Construction Accounting 101: A Basic Guide for Contractors"},"content":{"rendered":"<p><strong>Construction accounting<\/strong> is a unique form of bookkeeping and financial management. It\u2019s designed specially to help contractors track each job and how it affects the company as a whole. While it draws on all the same basic principles of traditional accounting, it also has several important and distinct features.<\/p>\n<p>According to the <a href=\"https:\/\/cfma.org\/events\/details\/cfmas-financial-benchmarker-results-216-2160\">Construction Financial Management Association<\/a> (CFMA) 2023 Financial Survey, 76% of construction companies that implemented industry-specific accounting systems reported improved project profitability compared to only 34% using general accounting software.<\/p>\n<p>In this blog, we\u2019ll dive into what makes <strong><a href=\"https:\/\/www.foundationsoft.com\/learn\/people-and-project-data-you-have-it-but-dont-know-how-to-use-it\/\">construction accounting<\/a><\/strong> unique and the information contractors need to track to attain long-term success.<\/p>\n<p><strong>Key Takeaways<\/strong><\/p>\n<ul>\n<li><strong>Construction accounting <\/strong>involves unique processes because its based on each individual project. Every calculation varies based on a variety of factors like project timelines, equipment needed, workforce, etc.<\/li>\n<li>Contractors should rely on <strong>job costing <\/strong>to accurately calculate their financial performance on a per-job basis.<\/li>\n<li><strong>Construction accountants <\/strong>should have a plan for revenue recognition based on their project needs and in compliance with laws and regulations established by the IRS.<\/li>\n<li><strong>Tracking and planning for retainage<\/strong> is crucial for a construction business\u2019 long-term success because it helps them understand outstanding totals they may still be owed and what project milestones they still need to hit.<\/li>\n<li>Construction payroll requirements, such as <strong>certified payroll<\/strong> and<strong> union reporting<\/strong>, can be time-consuming and challenging so contractors should have a plan in place to address them \u2014 like a construction payroll service.<\/li>\n<li>Recently, many contractors have begin investing in <strong><a href=\"https:\/\/www.foundationsoft.com\/learn\/how-contractors-can-ensure-a-successful-transition-to-new-technology\/\">construction accounting software<\/a> <\/strong>\u2014 like <a href=\"https:\/\/www.foundationsoft.com\/\">FOUNDATION\u00ae<\/a> \u2014 to address construction-specific accounting challenges.<\/li>\n<\/ul>\n<h2><span class=\"ez-toc-section\" id=\"Why_Is_Construction_Accounting_Different\"><\/span>Why Is <strong>Construction Accounting<\/strong> Different?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>In comparison to other industries, like retail or manufacturing, construction contracting has several distinct traits from an accounting perspective.<\/p>\n<table class=\"style-2\">\n<tbody>\n<tr>\n<th>CHARACTERISTICS OF CONSTRUCTION ACCOUNTING:<\/th>\n<\/tr>\n<tr>\n<td>1. It\u2019s based on each project.<\/td>\n<\/tr>\n<tr>\n<td>2. Production is decentralized.<\/td>\n<\/tr>\n<tr>\n<td>3. Contracts are long-term with extended payments.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<a target=\"_blank\" href=\"\/construction-accounting-software-ebook\/\" class=\"blog-cta-image\"><img decoding=\"async\" src=\"\/wp-content\/uploads\/2024\/05\/2024-05-FSL-blog-post-ad-5-ways-ebook.png\" alt=\"eBook Download\" title=\"eBook Download\"><\/a>\n<h3><span class=\"ez-toc-section\" id=\"1_Project-Based\"><\/span>1. Project-Based<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><strong>Contractors<\/strong>\u00a0operate their business primarily around projects. The financial focus revolves around each job.<\/p>\n<p>Think of any other business, such as a chain of designer cupcake shops or a pneumatic valve manufacturer. There, managers might treat each store, plant, product line or the entire business as a \u201cprofit center.\u201d For most industries, these are stable and predictable.<\/p>\n<p>Construction contractors, however, need to treat each construction project as a unique, short-term profit center because each construction project tends to have unique inputs and requirements.<\/p>\n<p>Even when projects have similar production requirements, they\u2019re often subject to different site conditions or local variables like:<\/p>\n<ul>\n<li>Labor availability<\/li>\n<li><strong>Cost of materials<\/strong><\/li>\n<li>Legislation<\/li>\n<\/ul>\n<p>In the end,\u00a0<strong>construction companies<\/strong>\u00a0that want to precisely control costs and bid intelligently must accurately <strong>track costs<\/strong> for each project individually, as well as the types of construction expenses and production activities that make up <strong>job costs.<\/strong> These numerous temporary <strong>cost centers<\/strong> are ultimately why contractors need to practice accurate\u00a0<a href=\"https:\/\/www.foundationsoft.com\/learn\/construction-accounting-101\/#jobcosting\"><strong>job costing<\/strong><\/a>.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"2_Decentralized_Production\"><\/span>2. Decentralized Production<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Similarly, in contrast to retail and manufacturing, production primarily happens across different jobsites rather than fixed locations like plants. Both equipment and labor then frequently move from site to site, leading to mobilization costs.<\/p>\n<p>It also means that equipment costs and labor costs always have to be tracked to each job site with the correct wage rate, and wage rates differ based on the areas prevailing wage and collective bargaining agreements (CBAs).<\/p>\n<p>On top of distinct project requirements, construction operations also features long and often seasonal production cycles. Because production can be less predictable, contractors often aren\u2019t able to retain large amounts of inventory.<\/p>\n<p>As a result, the cost and availability of production inputs can fluctuate and require careful tracking and planning.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"3_Long-Term_Contracts\"><\/span>3. Long-Term Contracts<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>In construction, production contracts can last years and have multiple extended payments over that time. Contract terms commonly allow 30, 60 or even 90 days to pay invoices.<\/p>\n<p>Retainage withholding or disputes can delay payment even longer. As a result, revenue recognition and cash management in construction both carry special considerations.<\/p>\n<p>Contractors need precise tracking and reporting, as well as collection and cash-flow strategies to maintain long-term success.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"The_Foundation_for_Construction_Accounting\"><\/span>The Foundation for <strong>Construction Accounting<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Factoring for some of the essential differences from general accounting, <strong>construction accounting<\/strong> relies on several important concepts.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"1_Job_Costing\"><\/span><strong>1. Job Costing<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<h4><span class=\"ez-toc-section\" id=\"What_Is_Job_Costing\"><\/span>What Is<strong> Job Costing?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p>For most businesses, the\u00a0<a href=\"https:\/\/www.foundationsoft.com\/software\/general-ledger\/\"><strong>accounting general ledger<\/strong><\/a>\u00a0(G\/L) is all they need. This lets them track transactions that impact the whole company\u2019s financial picture. However, because <strong>construction accounting<\/strong> is project-centered and production is de-centralized, contractors also need a way to track and report transactions specific to each job. That\u2019s <strong><a href=\"https:\/\/www.foundationsoft.com\/learn\/the-secrets-to-job-costing\/\">job costing<\/a><\/strong>.<\/p>\n<p><strong>Job costing<\/strong> is the practice in <strong>construction accounting<\/strong> of tracking a cost category (like indirect costs and direct costs) to specific projects and production activities. <strong>Construction accounting<\/strong> systems must integrate both <strong>job costing<\/strong> and accounting general ledger functions seamlessly.<\/p>\n<h4><span class=\"ez-toc-section\" id=\"What_Job_Costing_Does\"><\/span>What<strong> Job Costing <\/strong>Does<span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p>In <strong>construction accounting<\/strong>, <strong><a href=\"https:\/\/www.foundationsoft.com\/learn\/top-5-job-costing-tips-for-any-contractor\/\">job costing<\/a><\/strong> and the G\/L work together to give contractors a comprehensive view of their financial health. The G\/L looks across at the whole company, and <strong>job costing<\/strong> looks at the project level. And where the G\/L is made up of accounts (like materials expenses or A\/P), <strong>job costing<\/strong> is made up of:<\/p>\n<ul>\n<li>Individual projects<\/li>\n<li>Cost activities (like foundation or framing)<\/li>\n<li>Cost types (like labor or material costs)<\/li>\n<\/ul>\n<table class=\"style-2\">\n<tbody>\n<tr>\n<th>GENERAL LEDGER<\/th>\n<th>JOB COSTING<\/th>\n<\/tr>\n<tr>\n<td>Tracks company finances<\/td>\n<td>Tracks project data<\/td>\n<\/tr>\n<tr>\n<td>Produces financial statements, aging reports, over\/under billing<\/td>\n<td>Produces estimated vs. actual, production reports, WIP reports<\/td>\n<\/tr>\n<tr>\n<td>Organized by\u00a0chart\u00a0of accounts<\/td>\n<td>Organized by job cost structure<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>When all that job data is recorded and organized, the result is actionable reporting that can be used to make informed decisions. A few examples include:<\/p>\n<ol>\n<li>Contractors can coach their\u00a0<strong>project managers <\/strong>and<strong>\u00a0superintendents<\/strong>\u00a0on how to supervise ongoing costs and production successfully.<\/li>\n<li>Estimators can know the true break-even cost even in tight bids.<\/li>\n<li>PMs and supers have a \u201cscorecard\u201d to see how their crews are performing, learning and making adjustments.<\/li>\n<\/ol>\n<p>With better <strong>estimating<\/strong>, bidding and cost control, contractors should be able to\u00a0<strong>protect narrow profit margins<\/strong>\u00a0and keep taking on the right projects that will improve the financial health of the company, leading to long-term growth.<\/p>\n<h4><span class=\"ez-toc-section\" id=\"How_Job_Costing_Does_It\"><\/span>How<strong> Job Costing <\/strong>Does It<span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p><strong><a href=\"https:\/\/www.foundationsoft.com\/software\/job-costing\/\">Construction job costing<\/a><\/strong>\u00a0can measure several different aspects of a project to improve <strong>estimates<\/strong> and <a href=\"https:\/\/www.foundationsoft.com\/learn\/budgeting-better-with-construction-accounting-software\/\"><strong>budgeting<\/strong><\/a>. While financial reporting from the G\/L just looks at dollar amounts, contractors can use <strong>job costing<\/strong> to track:<\/p>\n<table class=\"style-2\">\n<tbody>\n<tr>\n<td>physical completion<\/td>\n<td>(in units)<\/td>\n<\/tr>\n<tr>\n<td>costs faced<\/td>\n<td>(in dollars)<\/td>\n<\/tr>\n<tr>\n<td>labor used<\/td>\n<td>(in hours)<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>It tracks these not only to each job but also within each group of job activities and each type of cost. For example, a contractor might \u201ccode\u201d an invoice to Job 140 (Lake Ave. Remodel), Cost Code 100 (Foundation), Cost Class \u201cMAT\u201d (Materials).<\/p>\n<p>Some might also categorize costs by project phases or sub-jobs, like floors of a structure or buildings in a development. The system of categories the contractor uses across all their jobs is called the\u00a0<strong>job cost structure<\/strong>.<\/p>\n<p>By tagging every transaction with information from the job cost structure, contractors can get an accurate picture of their costs. They can look at how much each aspect of operations costs on a particular job and across the company as a whole.<\/p>\n<p>Along with expenses, they can:<\/p>\n<ul>\n<li>Track progress according to specific <strong>budget<\/strong> items<\/li>\n<li>Detect patterns<\/li>\n<li>Report profitability or overruns for different production activities as they\u2019re underway<\/li>\n<li>Identify costs shared between multiple jobs, like equipment, and calculate a fair way to distribute those costs, which is called\u00a0<a href=\"https:\/\/www.foundationsoft.com\/learn\/what-is-overhead-allocation\/\"><strong>overhead allocation<\/strong><\/a><\/li>\n<\/ul>\n<p>In the end, the goal is to help contractors identify their true costs and profitability, which is otherwise very difficult to do in an industry with so many variables from contract-to-contract.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"2_Financial_Reporting\"><\/span>2. Financial Reporting<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<h4><span class=\"ez-toc-section\" id=\"Why_Does_Financial_Reporting_Matter\"><\/span>Why Does Financial Reporting Matter?<span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p><a href=\"https:\/\/www.foundationsoft.com\/learn\/top-5-construction-reports-and-how-they-help-your-business\/\">Financial reporting<\/a> gives contractors a more comprehensive view of their business\u2019s financial health. A few examples include:<\/p>\n<ul>\n<li>Cash flow reports: Gives contractors visibility into exactly when funds are coming in and when they\u2019re being directed elsewhere<\/li>\n<li>Work-in-progress reports: Help contractors predict future revenue streams and expenses to improve cash flow management<\/li>\n<li>Job cost reports: Provide in-depth analysis of financial performance on each project<\/li>\n<\/ul>\n<p>By compiling these reports, contractors can <strong>analyze trends<\/strong> and make more informed decisions to <em>maximize productivity and profitability<\/em>.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"3_Contract_Revenue_Recognition\"><\/span>3. Contract Revenue Recognition<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<h4><span class=\"ez-toc-section\" id=\"What_Is_Revenue_Recognition\"><\/span>What Is Revenue Recognition?<span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p>Revenue recognition\u00a0or\u00a0income recognition\u00a0is how a contractor determines when they\u2019ve officially made money on a project. Proper revenue recognition timing is crucial for accurate financial reporting.<\/p>\n<p>Revenue recognition also helps determine when a contractor should officially record an expense. Remember, this comes into play because construction contracts are usually long-term and often have delayed payments. Contractors aren\u2019t necessarily able to complete, bill and collect on a contract in the same month. In fact, for many contractors, this never happens.<\/p>\n<p>That leaves contractors and <strong>construction accountants<\/strong> with a choice of revenue recognition method. The method they choose will determine when income and expenses \u201ccount.\u201d In some cases, they might use one method for their own bookkeeping and one for <strong>tax<\/strong> reporting as long as they remain consistent over time.<\/p>\n<p>In <strong>construction accounting<\/strong>, the main options have traditionally included:<\/p>\n<ul>\n<li>Cash-basis<\/li>\n<li>Completed contract<\/li>\n<li>Percentage of completion<\/li>\n<\/ul>\n<p>However, contractors now must consider guidance from the ASC 606 revenue recognition standards with their construction CPA.<\/p>\n<h4><span class=\"ez-toc-section\" id=\"The_Cash_Method\"><\/span>The Cash Method<span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p>The simplest method of accounting for recognizing revenue is the <strong>cash method<\/strong>. Contractors record revenue when and only when they receive payment \u2014 and report expenses when and only when they actually pay. Therefore, there are no accounts payable (A\/P) or accounts receivable (A\/R). Under cash accounting, if money hasn\u2019t changed hands yet, there are no <strong>financial transactions<\/strong> to account for.<\/p>\n<p>While\u00a0<a href=\"https:\/\/www.foundationsoft.com\/learn\/cash-vs-accrual-accounting\/\">cash-basis accounting has several advantages<\/a>, it\u2019s not for every construction business. In fact, while many U.S. small businesses prefer <strong>cash accounting<\/strong> for its simplicity and flexibility, only some contractors qualify.<\/p>\n<p>According to the IRS, only construction businesses with less than a set <strong>average annual revenue<\/strong> can use the cash basis method for tax purposes. If a business\u2019 sales exceed that amount, they\u2019ll have to use another method for <strong>tax<\/strong> purposes. In that\u00a0case, they may decide simply to use another method for their own books as well.<\/p>\n<p>Each of these other methods will be known as an\u00a0accrual method. An accrual method will recognize an <strong>expense<\/strong> when it\u2019s incurred and <strong>revenue<\/strong> when it\u2019s earned, even if cash hasn\u2019t come in or out yet. In other words, it tracks how money \u201caccrues,\u201d or\u00a0<em>accumulates<\/em>, in holding before it moves as cash.<\/p>\n<p><a href=\"https:\/\/www.foundationsoft.com\/learn\/cash-vs-accrual-accounting\/\">Learn more about cash and accrual methods \u00bb<\/a><\/p>\n<h4><span class=\"ez-toc-section\" id=\"The_Completed_Contract_Method\"><\/span>The Completed Contract Method<span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p>Under the<strong>\u00a0completed contract method<\/strong> (CCM), contract income and expenses aren\u2019t reported until the project finishes. Of course, that doesn\u2019t mean there aren\u2019t expenses during construction or that contractors can\u2019t bill in the meantime.<\/p>\n<p>It just means that any profit isn\u2019t\u00a0<em>official<\/em>\u00a0until the end. Everything hits the income statement at one time. This sometimes means contractors are able to defer <strong>taxable<\/strong> <strong>revenue i<\/strong>f the contract won\u2019t be completed until the following <strong>tax<\/strong> <strong>year<\/strong>.<\/p>\n<p>While CCM is an accrual method, it differs from other <strong>accrual approaches<\/strong> in when revenue is recognized.<\/p>\n<p>CCM also has particular restrictions from the IRS. To be eligible, contractors can\u2019t exceed a certain average annual revenue, and their contracts must be able to be completed within a set timeframe.<\/p>\n<h4><span class=\"ez-toc-section\" id=\"The_Percentage_of_Completion_Method\"><\/span>The Percentage of Completion Method<span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p>The\u00a0percentage of completion method (PCM)\u00a0allows a contractor to recognize revenue as they earn it over time. As a project progresses toward completion, the contractor can bill for the work they\u2019ve performed, i.e. the completion percentage.<\/p>\n<p>Each time they issue an invoice, they can record the earned revenue. This continues until they finish the contract. In order to calculate how much of the contract they\u2019ve earned for a <strong>billing<\/strong> period, they might choose among a number of methods, including cost-to-cost and <strong>estimated<\/strong> percent complete.<\/p>\n<p>Unlike cash accounting, accrual accounting methods like PCM better reflect the economic reality of long-term projects since accrual-based reporting matches revenues with related expenses.<\/p>\n<p><a href=\"https:\/\/www.foundationsoft.com\/learn\/percentage-of-completion-method\/\">Learn more about percentage of completion \u00bb<\/a><\/p>\n<h4><span class=\"ez-toc-section\" id=\"ASC_606_Revenue_Recognition_Standards\"><\/span>ASC 606 Revenue Recognition Standards<span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p><strong>The Financial Accounting Standards Board<\/strong>, which oversees U.S. generally accepted accounting principles (GAAP), issued \u201c<strong>ASC 606: Revenue from Contracts with Customers<\/strong>\u201d as a new set of standards for recognizing revenue. GAAP provides best-practice accounting standards across all U.S. industries.<\/p>\n<p>As of December 2018, all companies reporting under GAAP need to follow ASC 606. And while private companies don\u2019t have a formal obligation to use GAAP, many choose to follow its best practices.<\/p>\n<p>Among other areas of guidance, these standards help contractors identify whether they should recognize revenue on their books at a single point in time (as with CCM) or over time (as with PCM). With ASC 606, the question hangs on the idea of\u00a0<em>transferring control<\/em>.<\/p>\n<p>Control is transferred when the constructed asset becomes the customer\u2019s to own. If it\u2019s on the customer\u2019s land, the foundation of a building might come under the customer\u2019s control as soon as it\u2019s poured, the frame as soon as it\u2019s put up, etc.<\/p>\n<p>With a total development project, transfer of control might not be until the contractor hands over the keys. But because it\u2019s part of a contract obligation, the parties must settle\u00a0<em>ahead of time<\/em>\u00a0when control is transferred\u00a0\u2014 at a point in time or over time\u00a0\u2014 to account for income appropriately.<\/p>\n<table class=\"style-2\">\n<tbody>\n<tr>\n<th>POINT IN TIME<\/th>\n<th>OVER TIME<\/th>\n<\/tr>\n<tr>\n<td>Contractor has no right to payment until the end<\/td>\n<td>Contractor has a right to payment at various stages<\/td>\n<\/tr>\n<tr>\n<td>Contractor has legal title until transfer<\/td>\n<td>Customer has legal title of the asset<\/td>\n<\/tr>\n<tr>\n<td>Contractor has physical possession until transfer<\/td>\n<td>Customer has physical possession of the asset<\/td>\n<\/tr>\n<tr>\n<td>Contractor has use and benefits until transfer<\/td>\n<td>Customer has ongoing use and benefits of the asset<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<div id=\"for-more-box\">\n<div id=\"for-more-box\">\n<p>Of course, the ASC 606 rule provides many other important standards for contractors to follow. That includes:<\/p>\n<ul>\n<li>Identifying whether they need to count a project as one contract or multiple contracts<\/li>\n<li>How to determine the contract price<\/li>\n<li>How to allocate the sales<\/li>\n<li>Changes to accounting for contract losses, stored materials and cost-to-cost calculations<\/li>\n<\/ul>\n<p>As with using cash accounting or methods like PCM and CCM, contractors need to consult with their construction CPA to make sure they\u2019re on track and using the most accurate accounting method for their business.<\/p>\n<p>These revenue recognition guidelines help ensure consistency in revenue recognition practices across different contractors.<\/p>\n<p><a href=\"https:\/\/www.foundationsoft.com\/learn\/contractors-new-revenue-recognition\/\">Learn more about the new revenue recognition standards \u00bb<\/a><\/p>\n<h3><span class=\"ez-toc-section\" id=\"4_Contract_Retainage\"><\/span>4. Contract Retainage<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<h4><span class=\"ez-toc-section\" id=\"What_Is_Retainage\"><\/span>What Is Retainage?<span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p>Retainage is the predetermined amount of money an <strong>owner<\/strong> may hold back from payment until they\u2019re satisfied with contract completion.<\/p>\n<p>A common retention amount might be 5-10% of the contract value or invoiced amount, but it can be less or more.<\/p>\n<p>The idea of retention is to provide the customer with some security against any deficiencies or defects on the project.<\/p>\n<h4><span class=\"ez-toc-section\" id=\"How_Retainage_Works\"><\/span>How Retainage Works<span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p>For most contractors, retainage is simple enough on paper, even though, by nature, it\u2019s an exception to the rule.<\/p>\n<p>In practice, when a contractor earns revenue under an accrual method like CCM or PCM, they have the right to issue an invoice and record the amount as an\u00a0<a href=\"https:\/\/www.foundationsoft.com\/software\/accounts-receivable\/\"><strong>account receivable<\/strong><\/a>\u00a0(A\/R) until it\u2019s collected.<\/p>\n<p>That is, except for retainage.<\/p>\n<p>According to revenue standards, the contractor doesn\u2019t have a current, unconditional right to the <strong>retainage portion of an invoice<\/strong>.<\/p>\n<p>Therefore, it\u2019s not treated as a receivable (A\/R) amount. Contractors record it instead in a separate asset account.<\/p>\n<p>Once a contractor does have a right to it, after satisfactory <strong>contract completion<\/strong>, the contractor issues an invoice for it and moves it from the\u00a0asset account to the A\/R account for collection.<\/p>\n<p>However, it looks on paper,<strong> retainage<\/strong> has a bigger impact in reality. Retainage laws vary from state to state, but in some cases, <strong>owner<\/strong>s can withhold it for over a year.<\/p>\n<p>Additionally, retention between 5-10% can actually take a 20-50% bite out of a contractor\u2019s profit.*\u00a0Given construction\u2019s narrow <strong>profit margins<\/strong>, smart retainage management is at least as important as proper retainage tracking.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"5_Specialized_Construction_Billing\"><\/span>5. Specialized Construction <strong>Billing<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Many industries operate around fixed-price, point-of-sale <strong>billing<\/strong>, but that\u2019s not always the case with construction. Because construction production is project-based, decentralized and long-term, contractors may use a wide range of <strong>billing<\/strong> styles and methods. Often, specialized software is required to track and create those <strong>billings<\/strong>. Let\u2019s look at just a few contract types and <strong>billing<\/strong> formats.<\/p>\n<h4><span class=\"ez-toc-section\" id=\"Fixed_Price\"><\/span>Fixed Price<span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p>Also known as a lump-sum contract, fixed price <strong>billing<\/strong> is based on a detailed <strong>estimate<\/strong> that gives a total cost for the entire project. It can also be considered in two types:<\/p>\n<ul>\n<li>Fixed-price hard bid<\/li>\n<li>Fixed-price negotiated<\/li>\n<\/ul>\n<p>A\u00a0<em>hard bid<\/em>\u00a0essentially says, \u201cNo matter what, we\u2019re building it for this amount of money.\u201d As a result, the risk is heavily on the contractor rather than the <strong>owner<\/strong>.<\/p>\n<p>If there are any overruns because of changed site conditions or input costs, it falls on the contractor.<\/p>\n<p>A\u00a0<em>negotiated<\/em>\u00a0lump sum, on the other hand, might allow for some contingencies and unforeseen events. <strong>Billing<\/strong> a fixed-price contract often happens on a percentage-of-completion basis with retainage withheld.<\/p>\n<h4><span class=\"ez-toc-section\" id=\"Time_Material\"><\/span>Time &amp; Material<span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p>Time-and-material <strong>billing<\/strong> bases the contract price on a per-hour labor rate\u00a0<em>plus<\/em>\u00a0the actual cost of materials used. For both the <strong>labor and materials components<\/strong>, the contractor may apply a standard markup.<\/p>\n<p>This builds their profit percentage into the amount and accounts for <a href=\"https:\/\/www.foundationsoft.com\/learn\/conquering-construction-overhead-allocation\/\">overhead costs<\/a>.<\/p>\n<p>For example, an HVAC technician who\u2019s paid $20 an hour might be billed at a fixed $50 per hour. Additionally, the equipment they install might follow a <strong>standard markup table<\/strong> by item or price, such as \u201c2x\u201d for a disposable air filter.<\/p>\n<p>If the technician spent two hours on the <strong>dispatch<\/strong> and additionally replaced a $20 air filter, the contractor would bill the customer $100 for labor plus $40 for materials.<\/p>\n<h4><span class=\"ez-toc-section\" id=\"Unit_Price\"><\/span>Unit Price<span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p>Under a unit-price contract, the contractor bills a customer at a fixed price-per-unit rate. Typically, this will be useful if they aren\u2019t able to <strong>estimate<\/strong> the <strong>unit production<\/strong> for the project with a lot of certainty.<\/p>\n<p>Unit-price billing is especially common among <a href=\"https:\/\/www.foundationsoft.com\/learn\/mitigate-rising-construction-costs-for-heavy-highway-projects-with-foundation\/\">heavy-highway<\/a> and utility construction companies.<\/p>\n<p>With unit price, risk tends to be shared between the contractor and customer since production quantities can end up higher than <strong>estimated<\/strong>.<\/p>\n<p>As long as they\u2019ve estimated the <strong>unit<em>\u00a0pricing<\/em>\u00a0correctly<\/strong>, the contractor may <strong>increase their revenue<\/strong> in this case. Otherwise, if unit pricing is off, they stand to lose money.<\/p>\n<h4><span class=\"ez-toc-section\" id=\"AIA_Progress_Billing\"><\/span>AIA Progress <strong>Billing<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p>One common <a href=\"https:\/\/www.foundationsoft.com\/learn\/fsl-understanding-construction-billing-reports-blog\/\">construction <strong>billing<\/strong><\/a> format is known as AIA progress<strong> billing<\/strong>, named after the <a href=\"https:\/\/aia.org\/\">American Institute of Architects<\/a>, which produces its official forms.<\/p>\n<p>As a type of progress billing, <strong>AIA billing invoices<\/strong> the customer based on the percentage of work completed for that billing period.<\/p>\n<p>This invoice generally consists of a signed summary sheet, followed by a schedule of values that details what\u2019s been completed and billed to date.<\/p>\n<p>Together, these documents are considered an \u201capplication\u201d for payment because the recipient will have a chance to review the schedule of values and either accept or dispute the billed amount.<\/p>\n<p>If they disagree, they\u2019ll send back \u201credlines\u201d so that the contractor can revise and resubmit the\u00a0<a href=\"https:\/\/www.foundationsoft.com\/interpreting-2023s-aia-billing-index-scores\/\"><strong>AIA billing<\/strong><\/a>\u00a0application.<\/p>\n<p><a href=\"https:\/\/www.foundationsoft.com\/learn\/\">Learn more about AIA <strong>billing<\/strong> \u00bb<\/a><\/p>\n<h3><span class=\"ez-toc-section\" id=\"6_Construction_Payroll\"><\/span>6. Construction <strong>Payroll<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Finally, with multiple profit centers and decentralized production, plus rigorous <strong>compliance<\/strong> requirements, construction also sees some of the more unique and complex <strong>payrolls<\/strong>. This is most true where there\u2019s:<\/p>\n<ol>\n<li>Prevailing wage requirements and certified <strong>payroll<\/strong> reporting<\/li>\n<li>Multiple pay rates, multiple states and multiple localities<\/li>\n<li>Other <strong>compliance<\/strong> reporting<\/li>\n<\/ol>\n<p><a href=\"https:\/\/www.foundationsoft.com\/learn\/is-your-construction-payroll-getting-the-most-out-of-job-costing\/\">Construction <strong>payroll<\/strong><\/a> systems must be able to handle these complex <strong>payroll<\/strong> scenarios, and many contractors use specialized <strong>payroll<\/strong> software to manage their <strong>payroll<\/strong> needs.<\/p>\n<h4><span class=\"ez-toc-section\" id=\"Certified_Payroll_Prevailing_Wage\"><\/span>Certified <strong>Payroll<\/strong> &amp; Prevailing Wage<span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p>Construction firms who work on public projects commonly have to navigate\u00a0<strong>prevailing wage payroll<\/strong>, often called \u201cDavis-Bacon payroll\u201d after the landmark <strong>Davis-Bacon Act<\/strong>.<\/p>\n<p><strong>Prevailing wage legislation<\/strong> requires contractors to pay the rate of compensation that\u2019s standard, or \u201cprevails,\u201d\u00a0for each worker classification on similar jobs in the area.<\/p>\n<p>Contractors must then certify their <strong>compliance<\/strong> on each project using certified <strong>payroll<\/strong> reports that may vary between different states or agencies.<\/p>\n<p>In some sense, prevailing wage <strong>payroll<\/strong>\u00a0is like a minimum wage but more complex.<\/p>\n<p>First, prevailing wage <strong>payroll<\/strong> may include and sometimes requires non-cash compensation called \u201c<strong>fringe benefits<\/strong>,\u201d such as health care or continuing education.<\/p>\n<p>Second, the prevailing wage rate will vary not just by area but also specific worker classification. Each jurisdiction may have particular determinations for what job functions qualify under which classification \u2014\u00a0<em>and<\/em>\u00a0which level within that class.<\/p>\n<p>So, a single employee might have multiple prevailing wage rates and fringe requirements on a single job, depending on what they\u2019re doing each hour. These rates can also change every six months to a year.<\/p>\n<p>Contractors must carefully track both base wage rates and total wage packages.<\/p>\n<p><a href=\"https:\/\/www.foundationsoft.com\/learn\/tips-davis-bacon\/\">Learn more about Davis-Bacon <strong>payroll<\/strong> \u00bb<\/a><\/p>\n<h4><span class=\"ez-toc-section\" id=\"Union_Payroll_Reporting\"><\/span>Union <strong>Payroll<\/strong> &amp; Reporting<span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p><strong>Union contractors<\/strong> face a similar situation as prevailing-wage contractors. Where certified <strong>payroll<\/strong> typically tracks wage and fringe obligations for <strong>government agencies<\/strong>, <strong>union payroll needs<\/strong> to track and report wage and fringe obligations to the union local.<\/p>\n<p>This becomes even more complicated with multi-union <strong>payroll<\/strong>. For example, a crew might have a home union but work on a project within another union local\u2019s jurisdiction.<\/p>\n<p>In that case, the home local might have a claim on health care contributions and pension deductions, while the job local wants dues and political action contributions.<\/p>\n<p>Each appropriate fringe and deduction would need to be split out to the right local and reported appropriately<\/p>\n<p><strong>Reporting requirements<\/strong> for a particular union may exist on a national or a local level. Contractors can typically determine their requirements, especially when entering another jurisdiction, by checking with their local union business manager.<\/p>\n<h4><span class=\"ez-toc-section\" id=\"Multiple_Rates_States_Localities\"><\/span>Multiple Rates, States &amp; Localities<span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p>Apart from multiple prevailing wage and union rates, contractors commonly deal with multiple rates for numerous other reasons. Working on jobsites in multiple cities and states, employees may have multiple <strong>tax<\/strong> withholdings, all within a single <strong>payroll<\/strong>.<\/p>\n<p>As a result, contractors in multiple jurisdictions have to watch out for double <strong>taxation<\/strong>. Managing different wage scales across jurisdictions requires careful attention to wage and hour laws.<\/p>\n<p>Chiefly, this can be a problem where an employee resides in one state and works in another. When states have a\u00a0<em>reciprocity<\/em>\u00a0relationship, however, the worker\u2019s state of residence may issue credit for <strong>taxes paid on income earned<\/strong> out of state.<\/p>\n<p>That way, they don\u2019t pay twice, but this requires careful attention to <strong>timecards and pay stubs<\/strong>.<\/p>\n<p>Construction companies also have to watch that they don\u2019t overpay on unemployment <strong>tax<\/strong> when an employee works in multiple states.<\/p>\n<p>Unemployment is often owed only to one state per employee. And if it\u2019s mistakenly paid to each state they worked in, contractors shouldn\u2019t expect to be contacted for a <strong>refund<\/strong>.<\/p>\n<p>Because it\u2019s not always clear where unemployment should be paid, the\u00a0<strong>Department\u00a0of Labor<\/strong>\u00a0suggests considering four factors in sequence:<\/p>\n<div id=\"for-more-box\">\n<table class=\"style-2\">\n<tbody>\n<tr>\n<td>1. Are the services localized?<\/td>\n<\/tr>\n<tr>\n<td>2. Does the employee have a base of operations?<\/td>\n<\/tr>\n<tr>\n<td>3. Is there a place or direction or control?<\/td>\n<\/tr>\n<tr>\n<td>4. What&#8217;s the employee&#8217;s state of residence?<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><a class=\"gdlr-button medium\" href=\"https:\/\/www.payroll4construction.com\/multi-state-taxes\/\" target=\"_blank\"  style=\"color:#ffffff; background-color:#000000; border-color:#999999; \"  >Learn more about multi-state payroll \u00bb<\/a><\/p>\n<h4 id=\"payroll-4\"><span class=\"ez-toc-section\" id=\"Compliance_Reporting\"><\/span>Compliance Reporting<span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p>Finally, contractors can face numerous\u00a0<strong>payroll reporting requirements<\/strong>, even if they don\u2019t have to file certified <strong>payroll<\/strong> or union reports. These can include:<\/p>\n<ul>\n<li><strong>Workers\u2019 compensation<\/strong><\/li>\n<li>New hire reporting<\/li>\n<li>Equal employment opportunity (EEO) minority <strong>compliance<\/strong><\/li>\n<\/ul>\n<p>Contractors need to have a keen awareness of these requirements for each <strong>jurisdiction<\/strong> they bid and work in, from the federal down to the local level.<\/p>\n<a target=\"_blank\" href=\"\/demo-video-player\/\" class=\"blog-cta-image\"><img decoding=\"async\" src=\"\/wp-content\/uploads\/2024\/03\/FSL-blog-post-ad-fsl-in-action.png\" alt=\"Watch a Demo\" title=\"Watch a Demo\"><\/a>\n<\/div>\n<\/div>\n<h2><span class=\"ez-toc-section\" id=\"Unlock_Construction_Accounting_Success_For_Your_Business\"><\/span>Unlock Construction Accounting Success For Your Business<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><strong>Construction accounting<\/strong> methods have a steep learning curve, but you can climb it and put your company in a better financial position.<\/p>\n<p>In addition to the fundamentals of general accounting, like debits, credits, overhead expenses, and financial statements,<strong>\u00a0contractors have many additional aspects of construction accounting to consider<\/strong>.<\/p>\n<p><strong><a href=\"https:\/\/www.foundationsoft.com\/learn\/does-construction-job-costing-really-matter\/\">Job costing<\/a><\/strong> helps construction business <strong>owner<\/strong>s stay on top of the numerous variables of running a project-centered, decentralized business and gives you insight into the <strong>company\u2019s financial performance. <\/strong><\/p>\n<p>Revenue recognition and retainage practices track with long-term contracts paid over time. Plus, construction <strong>payroll<\/strong> gives them more than enough to stay busy.<\/p>\n<p>The most important thing for contractors, whether experienced in the construction industry or just starting out, is to have help. A few common means of help include:<\/p>\n<ul>\n<li>A construction-specific CPA is an absolutely essential business partner.<\/li>\n<li>A construction <strong>payroll<\/strong> service that can handle <strong>multiple states<\/strong>, unions, and certified <strong>payroll<\/strong>s can save a tremendous amount of time.<\/li>\n<li>Integrated job cost accounting software \u2014 like <a href=\"https:\/\/www.foundationsoft.com\/learn\/tips-to-getting-the-most-out-of-foundation\/\">FOUNDATION<\/a> \u2014 is incredibly important for contractors who outgrow<strong> small business software<\/strong> and need more robust <a href=\"https:\/\/www.foundationsoft.com\/learn\/top-5-construction-reports-and-how-they-help-your-business\/\">financial reports<\/a>.<\/li>\n<\/ul>\n<p>For more information about FOUNDATION, <a href=\"https:\/\/www.foundationsoft.com\/#schedule-a-live-demo\">speak with an expert today<\/a>!<\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>While construction accounting and bookkeeping draws on many basic accounting principles, it has several important and distinct features. Dive in with an overview of the fundamental differences and examples, along with bonus learning resources.<\/p>\n","protected":false},"author":17,"featured_media":902,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_searchwp_excluded":"","inline_featured_image":false,"footnotes":""},"categories":[9,7,16],"tags":[11,14,12],"class_list":["post-11364","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-articles","category-recommended-reading","category-reporting-bookkeeping","tag-construction-reporting","tag-job-costing","tag-payroll"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.0 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Construction Accounting 101: Essentials for Success<\/title>\n<meta name=\"description\" content=\"Construction accounting goes beyond standard bookkeeping. 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