Construction Accounting 101: Expert Guide for Contractors

Construction worker figuring out finances.

Construction Accounting 101: Expert Guide for Contractors

Effective financial management is crucial for any construction business. However, the complexities of the industry necessitate a specialized accounting approach. Construction accounting focuses on tracking costs associated with various project elements, including labor and materials, while ensuring optimal profitability. 

Additionally, tax regulations present both challenges and opportunities for construction companies. In this release, you’ll learn to identify the key elements of construction accounting and financial management, to make informed decisions about your financial well-being.

The Basics of Construction Accounting

Construction projects involve unique financial considerations compared to other businesses. Construction accounting differs from standard accounting because of factors like long-term projects, changing costs, and milestone-based income. 

Construction income and expenses aren’t always recognized immediately. Construction accountants match revenue with related costs throughout the project’s life cycle. This “percentage of completion method” ensures your financial statements accurately portray project progress and health.

With multiple projects running concurrently, separate financial records are crucial. Construction accountants provide detailed tracking and analysis for each project. They categorize costs as direct job costs, indirect expenses, and overhead, giving you a clear picture of profitability. 

Cash flow management is also critical in construction due to potential payment delays. Construction accountants develop strategies to mitigate risks and ensure sufficient cash reserves to cover unexpected expenses. This proactive approach safeguards your company from cash flow issues common in the industry.

Managing Payroll and Labor Costs

Payroll and labor costs are a big piece of the pie in construction. If not managed well, they can throw your entire operation off balance. To mitigate this, your payroll system needs to be both accurate and follow all labor laws. Mistakes here can be expensive and hurt your business. 

Each project should have its own labor cost tracking. This might seem complicated, but it’s important to know exactly how much each worker costs on each job. This helps with financial reporting and planning future projects. Following overtime rules is also essential. Construction accountants need to track and record overtime hours correctly and pay workers the right rate. This keeps your employees happy and your company out of trouble.

Construction accountants don’t just track costs; they help control them too. By analyzing labor trends and predicting future needs, they can help companies make smart decisions about staffing and resource allocation. This keeps projects profitable and workers satisfied.

Handling Equipment and Material Costs

Tracking how much you spend on equipment and materials is crucial in construction. Prices change, equipment wears down, and you need a system to handle it all. Construction accountants track how much value equipment loses (depreciation) and how much it costs to fix (repairs). They also track when it needs to be replaced, and they link all these costs back to the projects that used the equipment.

Material costs can be tricky, but good construction accountants can help. They make sure you have a system to track how much material you have on hand (inventory). This helps prevent you from buying too much or letting materials go to waste. They also make sure you get good prices and assign materials to the right projects to avoid financial surprises.

More so, things don’t always go according to plan, especially with materials. Construction accountants can help by planning ahead and talking to suppliers regularly. This way, they can avoid delays and price increases if there are problems with getting materials.

Construction accounting software also helps accountants track equipment and material costs clearly. This lets managers see exactly how much things cost. With this information, they can decide if it’s better to buy or rent equipment and make sure they’re getting a good return on their investment. By tracking costs effectively, construction companies can save money and operate more efficiently.

Tax Considerations for Contractors

Taxes are more than just a filing deadline for construction companies. Construction has some special tax rules you should be aware of. These can save you money on your taxes. A good construction accountant can help you understand these rules and take advantage of deductions and credits specifically for construction businesses.

For tax purposes, it’s important to separate the direct costs of your projects from your general business expenses. This can be tricky, but a construction accountant can help you categorize everything correctly. Knowing the difference saves you money on taxes.

There are also tax credits available for construction companies that take certain steps, like building energy-efficient buildings or hiring workers from specific groups. These credits can significantly reduce your tax bill, but you need to understand the rules and keep good records to qualify. How you set up your business (sole proprietor, LLC, etc.) affects your taxes. A good accountant can help you choose the structure that minimizes your tax burden and fits your business goals.

Hiring a Construction Accountant

Construction has its own unique financial challenges. That’s why a construction accountant is a smart investment for your business. These accountants understand the ins and outs of construction finances. They know the special rules and regulations that apply to your industry. This can save you money on taxes and help you avoid costly mistakes.

A construction accountant goes beyond just routine bookkeeping. They track project costs, labor expenses, and revenue in detail. This helps you make smart financial decisions for your business. It is advisable to look for an accountant with a proven track record of success and with experience in construction as they will understand the complexities of the industry.

Take Your Finances to the Next Level!

Construction finances can be a lot to handle. Long-term projects, labor costs, material tracking – it’s a lot to manage. That’s why a construction accountant is a non-negotiable. A construction accountant is a financial partner. They track everything – projects, labor, materials, equipment – to keep your finances healthy and compliant. They also help you save money and make smart financial decisions.

For those looking to take their financial management to the next level, consider partnering with MKSH. Our team of experts is dedicated to providing comprehensive construction accounting services tailored to meet your specific needs. Don’t leave your financial success to chance—contact MKSH today and secure the financial future of your construction business. Visit our website or call us to schedule a consultation.

About MKS&H: McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by putting complex financial data into a truly meaningful context. But deeper than dollars and data, our focus is on developing an understanding of you, your culture, and your business goals. This approach enables our clients to achieve their greatest potential.

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About Author

MKS&H

MKS&H is committed to providing personalized tax and accounting services while developing a deep understanding of you, your culture, and your business goals. Our full view of financial systems and the people behind them allow us create and evolve the best solution that will help you and your business thrive. The accounting experts and consulting professionals at MKS&H work together to help you achieve the financial results you want.

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