The Basics of Construction Accounting

If you are an electrical contractor in the construction industry, you know that accounting and financial management can be more complex than in other industries. Construction accounting is a specialized form of accounting that helps contractors track, manage, and report their financial data more accurately than standard accounting. Standard accounting is great for many businesses, but most electrical contractors need something more robust. 

The main difference between construction accounting and standard accounting is that construction accounting must consider the unique features of construction projects. For example, construction accounting must track progress payments, retainage, change orders, work in progress (WIP), revenue recognition, and other project-specific financial data. This data must be accurately tracked and reported to manage construction projects effectively and to determine their profitability. This, in turn, impacts the profitability of the construction business. 

Key Aspects of Construction Accounting  

There are six key aspects of construction accounting that make it unique. These include: 

  1. Job Costing – A method to better manage your jobs by tracking the revenue and costs of jobs in detail to provide visibility into current and future profitability.  
  2. Sales and Costs of Sales Categories – Construction accounting includes several sales and cost categories not found in a standard accounting chart of accounts. This is due to the level of detail at which construction projects must be tracked. 
  3. Revenue Recognition – Revenue is recognized when work is completed. 
  4. Mobile Workforce – Construction work is conducted at the customer’s job location versus the contractor’s fixed business location.  
  5. Payroll Requirements – Construction labor often has specific requirements such as prevailing wage and local taxes. 
  6. Retainage – Common in construction, retainage is an amount withheld until the job is “completed” per the contract.  

Common Reports in Construction Accounting  

Many accounting reports are required to analyze your business’s financial health. Some of these reports, such as the trial balance, aged accounts receivable, aged accounts payable, profit and loss statement, the balance sheet, and the cash flow report, are borrowed from standard accounting. Other reports, such as the job cost report, job profitability report, earned value, work in progress, and estimates vs. actuals are project-based and are specific to the construction industry. 

Trial Balance: The trial balance is a list of all your construction company’s general ledger accounts and their balances. It also acts as a check to make sure the debits and credits in your general ledger accounts balance.  

Aged Accounts Receivable: The aged accounts receivable report shows all unpaid invoices grouped by how many days they are past due. This report is used to track outstanding invoices and manage collections. 

This report allows you to prioritize which invoices to collect first, lets you know which customers are consistently late in paying their invoices, and helps you monitor how retainage is impacting incoming cash flow.  

Aged Accounts Payable: The accounts payable aging report shows all unpaid bills, grouped by how many days they are past due. This report is used to track outstanding bills, manage vendor payments, and monitor retainage. 

Both the aged accounts receivable and the aged accounts payable reports can help you manage your business’s cash flow. The aged accounts payable report helps you manage your business’s cash flow by showing you all unpaid bills, grouped by how many days they are past due. This allows you to prioritize which bills to pay first. 

Profit and Loss Statement: The profit and loss statement shows your construction company’s income and expenses for a period of time, such as one month or one year. This report is used to track your company’s financial performance during this period. You can then compare profit and loss statements over time to see how your company is doing from year to year. 

Balance Sheet: The balance sheet shows your construction company’s assets, liabilities, and equity at any specific point in time—commonly month-end or fiscal year-end. This report is used to track your company’s financial position (also known as net worth). 

Job Cash Flow Statement: The job cash flow statement shows your construction company’s cash inflows and outflows throughout a specific project’s lifecycle allowing you to proactively understand the cash position for each job and the impact that each job is having on the overall company cash flow. 

Job Cost Report: The job cost report shows the costs incurred on a specific project. This report is used to track project expenses and help ensure that projects are profitable. The information on a job cost report is needed to proactively manage your jobs and can also be used to make decisions about future projects.  

The report measures project performance and tracks the current cost against the original estimates, allowing you to properly manage each job and make adjustments when possible. 

Job Profitability Report: The job profitability report shows the profit or loss for a specific project. This report is used to track project profitability and identify problem projects.  

This report is a project performance tool that shows the direct and indirect costs, revenue, and profit or loss for a specific project. This report can be used to track project profitability, as well as identify problems with certain projects. Additionally, this report can help you make more informed decisions about pricing for future projects.  

Work-in-Progress (WIP) Report: The WIP report is a project management and accounting tool that shows the status of a construction project and evaluates if a project is on budget and whether it is over or under billed. The WIP report calculates the value of work completed and how much revenue should be recognized based on the completion status of the project. 

This report is also important in helping a contractor understand their cash flow for each job. A job that is overbilled will typically produce positive cash flow, and a job that is underbilled will produce negative cash flow. The over and under billings need to be reflected in the contractor’s financials as a liability (over billings) or asset (under billings) on the balance sheet and an adjustment to revenue on the profit and loss statement.  

Estimates vs. Actuals Report: The estimates vs. actuals report is a detailed report comparing the estimated costs of a project to the actual costs incurred. This report is used to track project cost and potential overruns to identify problem areas, allowing you to make adjustments during the project as well as providing historical information when pricing future projects. 

A number of things can impact construction cost estimates, such as increasing material costs and labor rates from the time the estimate was created to the time the project is underway. The scope of the project also can affect the estimated costs of a job. 

Construction Accounting Software and Training 

As your electrical contracting business grows, construction accounting software can support you to proactively manage jobs, obtain financial assistance (loans, lines of credit, etc.), maintain a strong cash position, and stay compliant. Free construction accounting training is offered by Deltek ComputerEase through Construction Accounting University. Visit the Deltek website to register.

What’s Ahead 

John Meibers and Deltek ComputerEase are bringing Insights readers an educational series designed to guide electrical contractors through the transformation from standard accounting methods to construction accounting methods. Upcoming topics include job costing, work in progress, construction payroll, and revenue recognition. This is the first installment of the series.