In the construction industry, success isn’t just measured by completed projects—it’s also measured by profit margins, efficient cost tracking, and smart financial decisions. One of the most effective tools for achieving and maintaining profitability is a well-structured chart of accounts (COA). For construction businesses, this accounting tool can often mean the difference between a thriving operation and a struggling one.
In this article, we’ll walk you through the best practices for structuring your chart of accounts, share practical tips, and show you how we can help you align your accounting with long-term growth.
What Is a Chart of Accounts (COA) in Construction Accounting?
A chart of accounts is a comprehensive list of financial accounts that a company uses to categorize all transactions. It organizes financial data into meaningful buckets—such as income, expenses, assets, liabilities, and equity—so business owners can accurately track, analyze, and report on their operations.
In the construction industry, the COA must be more detailed and specialized than in other fields due to the complex nature of job costing, labor tracking, materials, and project-specific revenue streams.
Why It Matters
A properly structured COA:
- Helps monitor job costs and profitability by project
- Simplifies budgeting and forecasting
- Enhances compliance and financial transparency
- Enables data-driven decision-making
Key Considerations for Structuring a Construction Chart of Accounts
When designing a COA for a construction business, it’s important to ensure it aligns with both operational needs and long-term financial goals.
1. Align with Your Business Structure
Are you a general contractor, subcontractor, or homebuilder? Your COA should reflect the services you provide and how you earn and spend money. Each business model has unique financial categories, so the chart must be customized accordingly.
2. Use a Numbering System
A smart numbering system simplifies reporting and analysis. Most COAs start with these categories:
- 1000–1999: Assets
- 2000–2999: Liabilities
- 3000–3999: Equity
- 4000–4999: Revenue
- 5000–5999: Cost of Goods Sold (COGS)
- 6000–7999: Operating Expenses
Example:
- 5100 – Direct Labor
- 5200 – Materials
- 5300 – Subcontractors
- 6100 – Office Salaries
- 6200 – Utilities
The numbering format creates consistency and scalability as the business grows.
3. Separate Direct vs. Indirect Costs
In construction, it’s crucial to distinguish between costs tied directly to a job and general business expenses. Mixing them up can throw off your job costing and eat into your profits. Direct costs—like labor, materials, subcontractors, and equipment rentals—should be tracked separately from indirect costs, such as office rent, admin salaries, insurance, or marketing. Clear separation gives you a more accurate view of project profitability and helps you make smarter financial decisions.
Essential Accounts to Include in Your Construction COA
Below is a sample breakdown of key accounts every construction business should consider:
Assets
- 1010 – Cash in Bank
- 1050 – Accounts Receivable
- 1200 – Construction Equipment
- 1300 – Prepaid Expenses
Liabilities
- 2010 – Accounts Payable
- 2050 – Payroll Liabilities
- 2100 – Loans Payable
- 2200 – Customer Deposits
Equity
- 3010 – Owner’s Capital
- 3020 – Retained Earnings
Revenue
- 4010 – Construction Income
- 4020 – Change Order Revenue
- 4030 – Service Work Income
Cost of Goods Sold (COGS)
- 5010 – Labor Costs
- 5020 – Materials Purchased
- 5030 – Subcontractor Payments
- 5040 – Equipment Rental
- 5050 – Job Site Expenses
Operating Expenses
- 6010 – Administrative Salaries
- 6020 – Office Supplies
- 6030 – Vehicle Expenses
- 6040 – Insurance
- 6050 – Marketing
This framework allows construction companies to track profitability on a per-job basis and analyze where money is made or lost.
Job Costing and the Chart of Accounts: A Powerful Combination
In construction, job costing is essential, and it gets even more powerful when your chart of accounts is set up to support it. When every expense is linked to both an account and a specific job, you can see exactly where your money’s going and how each project is performing. This kind of clarity helps you bid smarter, avoid budget surprises, spot your most profitable services or teams, and break down margins by client or project type.
Practical Tips for Optimizing Your COA
To get the most out of your chart of accounts, follow these best practices:
1. Customize for Your Business, But Don’t Overcomplicate
While it’s important to tailor your COA, avoid unnecessary granularity. Too many sub-accounts can create clutter and confusion. Focus on accounts that provide actionable insights.
2. Use Class and Location Tracking
For companies with multiple crews or locations, using class or location tracking in your accounting software adds another layer of visibility without complicating the COA.
3. Review and Update Regularly
Your business evolves, and so should your chart of accounts. Review it quarterly or annually to eliminate unused accounts and reflect new services, vendors, or cost categories.
4. Train Your Team
Ensure everyone involved in accounting or job tracking understands how to use the COA correctly. Proper data entry ensures accurate reporting and better decision-making.
How MKS&H Helps Construction Companies Optimize Their COA
At MKS&H, we specialize in financial systems built for construction. Our team knows the unique challenges contractors face, from job costing to compliance. We help you build a custom chart of accounts, set up a reliable job costing system, and keep your books audit-ready. We also focus on cutting unnecessary overhead and finding tax-saving opportunities. The result? Better bids, clearer project insights, and stronger profits.
Build a Stronger Financial Foundation Today!
A well-structured chart of accounts is a strategic asset for any construction business looking to grow profitably. By organizing financial data effectively, you gain visibility into every dollar spent and earned, improve project management, and make informed decisions that drive success.
At MKS&H, our experience in construction accounting makes us the perfect partner to help you build or refine your COA. Whether you’re just starting or rethinking your financial structure, we’ll create a solution that supports your long-term profitability. Contact us today to get started!
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 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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