Introduction

Construction accounting is not your everyday, run-of-the-mill type of accounting. Beyond the addition of various accounts, construction accounting deals with expenses, labor, and compliance streams for multifaceted projects ranging from bridge construction to houses. Unlike accounting, which adheres to a set timeline, construction accounting requires both flexibility and precision when tracking distinct costs and revenues for individual projects. It is a unique discipline that helps manage the financial intricacies of sophisticated, long-term construction projects. Here at Intersoft Systems Inc., we offer specialized software solutions tailored to mitigate the bewildering realms of construction management and ensure financial prosperity. Join us as we highlight the characteristics of construction accounting and the advantages of using tools specifically developed for it.

Key Differences from Traditional Accounting

If you belong to this sector, knowing the differences between construction accounting as well as traditional accounting is important. In this section, let us explain the differences in how construction accounting is done versus the standard accounting methods.

Project-Centric vs. Period-Centric

Construction Accounting:

Construction accounting differs from traditional accounting, which operates on a cyclical basis (monthly or quarterly) because it is project-centric. Costs and revenues are tracked for each individual project. A bridge construction project spanning 12 months will also have its financial tracking, even if it crosses multiple fiscal periods. This encompasses each project having a budget, a distinct timeline, cost codes, and milestones that require progress tracking.

Traditional Accounting:

In contrast to construction accounting, traditional accounting emphasizes financial periods (monthly, quarterly, or yearly) and their corresponding reports. Revenues and expenses are recorded according to these periods and not broken down based on individual projects.

Why It Matters:

In construction, the finances of a project can be greatly affected by delays to any single phase of the project. Having the ability to track costs and revenues allocated to each project enables the organization to monitor profitability and provide insights in real-time.

Revenue Recognition

Percentage of Completion (POC):

Construction accounting has a peculiar approach field termed the Percentage of Completion (POC) method, which is used to recognize revenue. Instead of waiting for payments to be received, revenue is recognized as it is achieved based on a project’s milestone progression. This enables construction firms to align revenue with costs throughout the lifespan of a project. For instance, if a client has not paid the entire amount for a construction project, 50% of the construction project’s revenue can be claimed as long as 50% of it is completed.

Traditional Accounting:

In regard to cash-based accounting, revenue is only recognized when cash changes hands. Common accounting practices operate either on some variant of accrual based or cash based accounting. When it comes to business activities, the accrual accounting says that revenue recognition is done when the activity is performed, and receipt for payment is not mandatory at that time.

Why It Matters:

The accounting method in use of POC ensures construction companies depict work in progress accurately, as do their financial statements and reports relative to ongoing projects, instead of masquerading cash flows with constructed revenue figures.

Multiple Compliance Issues

Along with traditional accounting, construction accounting comes with certain industry specific scope of work regulations and compliance marking hurdles not found in standard accounting. These include:

AIA Contracts (American Institute of Architects): These contracts are standard in construction projects and dictate how billing is done, especially for progress payments.

Prevailing Wage Laws: In the case of government-funded projects, contractors need to monitor and report hourly wage rates and pay commensurate with local and federal wage payment laws.

Why It Matters:

Absence of these specialized tools makes payment and compliance factors highly prone to discrepancies, errors or delays. Having a system that takes these details into consideration enhances security against legal and financial risks.

Some problems within construction accounting
Although construction accounting comes with certain benefits, it has some problems which need to be solved with proper planning.

Decentralized Operations

Field vs. Office:

A significant portion of work is performed in the field, away from the main office, in the construction industry. This is known as a decentralized form of operation. If not managed correctly, it can create discrepancies and inefficiencies. For instance, logging material costs as a foreman at a construction site may involve entering the data on a mobile device. Unless the data is transmitted to the central office system in real time, there will be lags in the financial records being updated, which is bound to create problems.

Example:

A case in point is a foreman noting that $500 worth of steel was used for the day’s work. The need to update the accounting system occurs at some point in the future. Other charges has already been incurred, bringing about confusion and possibly errors in cost reporting.

Intersoft’s Fix:

With Intersoft Systems Inc, we provide mobile app integrations that are seamless in nature, enabling field users to log costs as they are incurred and update financial data in real time. All expenses will instantly be updated in the ledger, ensuring reliability and timely information.

Cash Flow Management & Retention

In construction, it’s quite normal that a portion of the payment is retained until the contractor completes the work. This retention is usually between 5-10% of the payment.

Holdbacks:

These holdbacks are intricate within the scope of construction accounting. Companies can run into issues with cash flow or overlooked retentions if these holdback amounts are not tracked properly.

Intersoft’s Fix:

Our solution comes with the benefits of automated retention tracking. All holdbacks are ensured and monitored to be released based on the completion criteria of the project guarantees. Contractors are eased in managing their cash flow for they do not have to concern themselves with numerous retained sums they stand to lose.

Why Generic Software Fails

Broad-range accounting software like QuickBooks undoubtedly works for a lot of other industries, but falls short in meeting the needs of the construction sector. Here’s why:

Lack of Job Costing:

The construction industry is accompanied by a wide array of services and tasks, making specialized accounting systems a necessity. The detail of job costing provided in generic accounting tools is often outdated and simplistic.

Projects can contain hundreds of individual cost codes, inclusive of labor, materials, equipment, and even subcontractor expenses. Self accounting solutions like QuickBooks often cannot manage these intricacies without extenuating manual work and vigilance.

No Compliance Tools:

Missing compliance features specific to the construction industry, such as missing lien waiver deadlines, reporting prevailing wage gaps, or managing subcontractor insurance certificates, can lead to expensive legal issues and financial penalties.

Case Study:

After switching to Intersoft Systems Inc., a mid-sized contractor firm reported a 70% reduction in compliance errors across the board. This included missed deadlines and wage reporting mistakes. Their audit readiness also improved, allowing them to complete projects on time and within budget without the usual financial headaches.

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Conclusion

Compared to traditional accounting, construction accounting resembles more of a free-for-all. Its project-based nature, complicated compliance frameworks, and issues like decentralized operations and retention delves into tracking necessitate specialized, accurate, and profit-focused software. Intersoft Systems Inc. offers specialized solutions designed for the construction industry, assisting contractors in overcoming the confusion of managing numerous projects while obtaining accurate and timely financial information. Learn how our tools can transform your accounting processes, allowing seamless execution of construction projects from beginning to end.

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