Construction Accounting: Navigating Financial Success

How Porte Brown Can Help Construction Companies with their Finances

When considering a CPA contractor, 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 the construction industry, like Porte Brown. 

As a premier construction accounting firm with a team of five Certified Construction Industry Financial Professionals (CCIFPs), our Chicago CPA firm provides comprehensive construction tax and accounting services.

A Porte Brown CPA for contractors can help you with tax compliance, cash flow management, and financial reports. We also help with other areas of your business with contractor accounting services like bidding analysis, cost segregation studies, and trend analysis. Our dedicated CPAs have deep expertise in accounting for construction and understand the full scope of issues unique to this field. They’ll also provide a number of powerful bookkeeping solutions that enable business owners and financial managers to boost overall performance and ensure their accounts are in pitch-perfect working order.

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.

Proud to serve:

• General Commercial and Building Contractors
• Heavy Highway Contractors
• Excavating and Demolition Contractors
• Paving, Concrete and Masonry Contractors
• Homebuilders and Commercial/Residential Real Estate Developers
• Specialty Trade Contractors
• Architects and Engineers

Services include:

• Timely and Accurate Certified Audits, Reviews and Compilation Reporting
• Understanding Complex Tax and Financial Reporting Requirements
• Preparation and Analysis of Completed Contract and Percentage of Completion Schedules
• Assist in Securing Adequate Financing and Bonding Requirements
• Cash Flow Management
• Benchmark and Trend Analysis
• Seminars and Workshops
• Bidding Analysis and Implementation
• Bond Insurance Financial Reporting
• Cost Segregations Studies
• Entity Structure
• Private Placement Memorandums (PPM)
• Construction Project Accounting

What is Construction Accounting?

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. This signifies that every project must establish an accounting approach that thoroughly considers the list of distinct variables pertinent to its particular situation.

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. For this reason, construction clients need the help of experienced construction accounting firms to stay on top of these processes.

What are the Key Construction Accounting Principles?

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.

Revenue Recognition and Job Costing

Construction accounting firms 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 will need a qualified construction tax accountant that can use a variety of billing methods and techniques to track revenue accurately.

Construction Accounting Best Practices

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 with a reputable accountant for contractors. 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. When it comes to developing strategies for accounting, contractors can reduce risk and navigate state, local, and federal government tax planning by having someone on their side who knows what to focus on.

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.

Partner with Porte Brown for Contractor Accounting Services

Construction accounting is complicated, and failure to adhere to key principles can mean businesses pay more each year than is necessary. Take advantage of top contractors’ accountants who can decode the terms that influence how you manage your operations and file your taxes. 

Gain the services of a qualified CCIFP with years of experience and an accountant for contractors who can mitigate your tax burden and ensure complete regulatory compliance. Mitigate your operating costs by utilizing state and federal tax credits to enhance your annual profitability.

Negotiate the challenges of the construction industry with the accountants’ contractors that manage countless clients, ranging from small building companies to household names. A top accountant for a contractor embraces the latest technology, stays abreast of the latest regulations, and finds ways for you to keep more of your profits.

As one of the leading construction accounting firms, our team consistently offers our clients the high standard of service they expect by providing tailored packages that meet the required obligations of construction companies nationwide. We take pride in delivering the highest quality accounting for a contractor, focused on the unique obstacles faced by those in the construction business.

Get in touch with Porte Brown to learn more about the benefits of employing a professional accountant for contractors.

Active Industry Associations

• Construction Financial Management Association (CFMA)
• Illinois Road and Transportation Builders Association (IRTBA)
• Federation of Women Contractors (FWC)
• Association for Subcontractors and Affiliates (ASA)