Construction Accounting 101: A Simple Guide for Contractors

We can also advise you on how to structure major transactions to minimize their impact on your financial position and bonding capacity. For FICA tax (as well as federal income tax), you must complete and file Form 941, Employer’s Quarterly Federal Tax Return. This form is due by the last day of the month following the end of each quarter, although some employers might be considered annual filers.

With the right process, you can save time on your invoicing, accounting, bookkeeping, and tax preparation, even without previous construction accounting experience. This will make it easy for you to send invoices online, track expenses, monitor payment status, generate financial reports, and more. The average hourly rate for an accountant in the U.S. is about $35, making it quite affordable for the average owner.

Various direct and indirect costs in construction accounting

Contractors who work with private businesses and individuals help them prepare these returns and ensure compliance with tax laws and regulations. The specialized financial reporting, income tax rules and cyclical nature of the construction business mean that it’s essential to partner with a construction CPA firm that knows your industry. There are numerous rules, requirements and regulations that are unique to construction. And to keep you up accountant for contractor to date, we provide a comprehensive guide to construction accounting. Because the accrual method recognizes income and expenses before they actually occur, it enables construction financial managers to make decisions based on financial statements that project future cash flow. That way, management can see problems before they occur and make adjustments as necessary — like securing short-term financing or re-evaluating upcoming projects.

They should always be proactive—never stuck looking in the rearview mirror when updates become effective at the end of the year. The choice of accounting method for a joint venture usually depends on the level of ownership and control of the joint venture, which construction companies may not be aware of until it is too late. The owner or shareholder of a construction company should carefully consider the tax implications of the business structure.

Methods of accounting

Modern construction accounting software simplifies financial management and helps contractors comply with tax laws. The reporting feature allows you to track your projects and analyze your company’s entire finances in real-time so you can quickly identify and fix problems before it’s too late. 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 and other project-specific financial data.

• Estimators can determine the break-even cost and have scorecards to check crew performance, learning and adjustments.
• As an industry standard, AIA progress billing is one of the most widely used forms of contract in the construction industry.
• It’s also true that this method is flexible and simple, leading to less confusion in financial statements.
• It is essential to check all costs regularly and ensure they are included in the overhead calculation.
• Fixed prices and point-of-sale charges are used in many industries but not always in construction.

Adding to that, your vendors, subcontractors, project owner, other project stakeholders also come with their own technology stacks. The U.S. construction industry is a giant of the U.S. economy, accounting for 4.3% of the country’s GDP and employing 7.8 million people. This guide will help give you a better understanding of how expenses can affect your tax bill and examples of what is and is not classed as an expense. Are you thinking of setting up your own business and becoming a contractor or freelancer?

Difference between Construction Accounting and Regular Accounting

So if you’d rather discuss issues in person, you might find yourself regularly paying additional fees on top of your monthly package. You can confirm that an accountant is qualified by looking them up on the ACCA directory or the ICAEW website. Alternatively, try the FCSA (Freelancers and Contractor Services Association) directory or the IPSE marketplace. Most accountants typically go on to obtain a more advanced AAT qualification, an ATT, ACCA, or CIMA qualification, or a university degree. Often, they also register with a recognised professional body, such as ICAEW (Institute of Chartered Accountants in England and Wales) or ACCA (the Association of Certified Chartered Accountants).