Construction accounting has a breadth of concepts, from basic to complex. To highlight this, here is a summary of these concepts:
1. Percentage of Completion Method
The Percentage of Completion Method matches revenue and expenses with the work completed. A project that’s 40% complete would, in theory, see 40% of its total anticipated revenue and expenses recognized. However, it’s not without challenges. Professionals must employ robust estimation skills, understanding that every brick laid, or beam installed equates to financial implications.
2. Completed Contract Method
Within the Completed Contract Method, revenue, expenses, and profits are not factored into the equation until the project wraps up. While it guards inflating forecasts, it might not best serve those wanting a periodic grasp on their project’s monetary flow.
3. Navigating Change Orders and Contract Claims
In the ever-evolving construction landscape, unpriced change orders can have material impacts to a project. At the same time, contract claims — the formal requests for damage compensation due to unforeseen disruptions — are critical items that can impact a project’s bottom line. Both demand careful evaluation and robust documentation.
4. Overbilling Liabilities and Contract Retainage
While overbilling can boost immediate cash flow, it can pose challenges in the
future. While contract retainage — i.e., the assurance held back until a project’s completion — can delay present cash flow, it can safeguard against potential shortcomings in the future.
What these concepts reinforce ss the business benefits that industry-specific software can provide to construction firms. For this reason, leading construction firms are turning to accounting solutions designed specifically for the construction industry.