Date Published: October 17, 2024
Construction accounting is unique compared to most other industries due to its project-based nature, long-term contracts, and decentralized production. Here are some key differences:
Project-Based Accounting:
- Job Costing: Each construction project is treated as a separate financial entity, allowing for detailed tracking of revenue, expenses, and profitability for each job.
- Revenue Recognition: Revenue is often recognized as the work is completed, rather than when a sale is made, which can be a significant difference from other industries.
Long-Term Contracts:
- Progress Billings: Construction projects can last for months or even years, requiring periodic progress billings to track revenue and costs throughout the project.
- Contract Modifications: Changes in contract terms or scope can impact project costs and revenue, necessitating adjustments to accounting records.
Decentralized Production:
- Job Sites: Construction projects often involve multiple job sites, making it challenging to track costs and resources accurately.
- Equipment and Materials: Managing inventory and equipment usage across different job sites can be complex.
Percentage of Completion Method:
- Revenue Recognition: Construction companies often use the percentage of completion method to recognize revenue over the life of a project, which can be different from other industries that might use the completed-contract method.
Specific Accounting Standards:
- GAAP and ASC: Construction accounting follows specific Generally Accepted Accounting Principles (GAAP) and Accounting Standards Codification (ASC) rules, which are tailored to the unique characteristics of the industry.
Industry-Specific Software:
- Specialized Tools: Construction companies often use specialized accounting software that is designed to handle the complexities of project-based accounting, long-term contracts, and decentralized production.
These differences make construction accounting a specialized field that requires a unique understanding of the industry’s practices and challenges.
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John Page started his career in the surety bond industry in 1987.
He is a former Vice President of a top 10, national surety company and the founder and former president of Surety1.
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