When considering a CPA, construction companies should be extra careful. Because of its complexities, construction accounting can be incredibly challenging and is something that a conventional accounting firm is ill-equipped to handle. You need to get the services of an accounting firm specializing in construction industry, like Porte Brown.
As a premier construction accounting Chicago firm with a team of seven Certified Construction Industry Financial Professionals (CCIFPs), our Chicago CPA firm provides comprehensive construction tax and accounting services.
A Porte Brown construction CPA, can help you with tax compliance, cash flow management, and financial reports. We also help with other areas of your business with services like bidding analysis, cost segregation studies, and trend analysis.
As a proud construction accounting Chicago firm that has been in business for over 75 years, Porte Brown knows the unique accounting needs of construction firms and can address them effectively.
The construction industry is structured very differently from most conventional businesses. They have their own particular needs as it deals exclusively in long term contracts and production cycles. These circumstances make regular accounting practices unsuitable.
That's why accounting for a construction company, contractor, or home builder needs a new set of methods and principles. This is called construction accounting.
However, what makes construction accounting different from regular accounting?
For one, construction accounting is project-based. Every construction project is treated as a "mini-company" with its own costs and revenue.
Second, because payments typically take longer than 90 days, a long term approach is preferred. That means a construction accountant needs an alternative method to accurately track, manage, and analyze a company's cash flow and revenue over this time.
Lastly, construction accounting is mostly a decentralized process. Labor and materials move from one site to another, as opposed to factories that stay put. This puts special consideration to mobilization costs.
The unique needs of the construction industry mean that construction accounting services adhere to different principles than standard accounting.
Two of the most important factors include job costing and revenue recognition. These can inaccurately describe a project's financial viability if not done correctly. We'll discuss this topic in more detail later.
Another concept is retainage, which is money held back by the customer until the construction job is completed. This is meant to protect the owner and ensure the project is done with minimal defects or faults.
Billing is another crucial area of construction accounting. Due to the unique nature of construction projects, firms may employ several billing methods. The simplest is fixed price, or a lump sum, which sets an amount for the entire project. Billing can also be done on a time or material basis (charged per hour plus material costs). Finally, there's the AIA progress billing, named after the American Institute of Architects. It's a method that charges the client for a certain percentage of work done for a given billing period.
Construction industry accountants emphasize the importance of revenue recognition as it details how income and expenses are tracked in a construction project. There are three methods to choose from.
The cash method is the simplest. In a nutshell, it recognizes revenue only when the cash hits the company's bank account, and notes expenses only when the firm pays them out. While straightforward, not every company can use this method. The IRS, for example, has a set of criteria on who can use the cash method for tax purposes.
On the flip side of the cash method is the completed contract method (CCM), wherein all income and expenses are recorded only when the project is completed. This has several tax advantages, such as deferring taxable revenue. Just like the cash method, however, the IRS restricts this method only to qualified businesses.
Lastly, you have the percentage of completion method (PCM), which records income and expenses as the project progresses. While it can be the most accurate method, it's also the most complex. A construction project accountant will need to use a variety of billing methods and techniques to track revenue accurately.
While it's challenging to do construction accounting, Chicago firms can make the process easier by keeping a few best practices in mind.
First, tax compliance can get tricky with construction companies. As a result, make sure you've decided on which strategies you'll be using. There are different approaches you can try, and which one you pick will come down to the size and structure of your business. The important thing is to choose a strategy and stick with it.
Next, create a job costing goal. Job costing is one of the cornerstones of construction accounting, but it can be a tedious job task. Make sure you explain the importance of job costing to your staff and provide a clear timeline for them regarding the construction job.
Lastly, use accounting software that can handle the complexities and intricacies of construction accounting. Such applications can automate a lot of the tedious areas and can significantly simplify the process for you.
Porte Brown is proud to have seven Certified Construction Industry Professionals. The CCIFP designation demonstrates a thorough understanding of the construction industry’s financial rules and regulations. The Institute of Certified Construction Industry Financial Professionals employs a rigorous test based on current practices and is representative of the activities a construction financial professional faces on a daily basis. The CCIFP designation is one of the few financial management certifications for the construction industry that truly exemplifies the very best of what the construction financial industry has to offer.
We believe it is important for our staff to have the necessary specialized training to provide the highest standard of accounting services in the construction industry. The CCIFP designation permits Porte Brown to provide additional guidance the average accounting firm simply cannot provide for construction firms.
If you have any questions in regards to the CCIFP designation, please feel free to leave us a message.
Get in touch today and find out how we can help you meet your objectives.