Understanding Construction Accounting and Its Importance

As someone who works in construction, you know that construction projects require not only proper planning but also tight cost control. You also understand that managing finances is often a big challenge because when construction costs are not recorded properly, it can cause chaos in budgeting and scheduling. This is where construction accounting comes in. 

Construction accounting is a method of financial management that focuses on recording and reporting on construction projects. It works by allocating costs and revenues based on the stages of project completion, ensuring finances remain under control throughout the entire building process.

However, why should construction projects implement construction accounting? How is it different from the general type of accounting that is also widely used by various businesses? Read on as we discuss in detail construction accounting and why you should apply it to your projects. 

What is Construction Accounting and Why is it Important to Implement? 

Construction accounting is a branch of accounting specifically designed to handle financial management in construction projects. It involves recording, reporting, and managing all financial aspects related to the project, including expenses, revenues, and profits.

Why is it important to apply construction accounting? Now imagine a construction project situation full of complicated things, such as fluctuating material prices, design changes, and additional labor costs. If you don’t keep records using construction accounting, you will certainly not have historical data about what was spent to run the project.  

So, what will be the impact? The company will slowly lose control of the project’s finances. When revenue is not managed properly, projects can experience cost overruns, late payments, and bankruptcy. Without a solid accounting formula, it is also difficult for management to monitor and evaluate project performance. 

With construction accounting, you can avoid these risks. This accounting allows companies to anticipate these risks, ensure projects run on budget and time, increase transparency, and provide a solid basis for project management to make more informed decisions regarding financial strategies. 

Construction Accounting vs Regular Accounting: What’s the Difference? 

We understand that you must have questions regarding the difference between general accounting and construction accounting. What is the difference between the two? Isn’t everything the same in the world of accounting because it meets with the calculation of numbers? 

One of the differences between general accounting and accounting for construction lies in the way costs and revenues are managed. In general accounting, the recording of transactions is done periodically, such as monthly or annually. Meanwhile, construction accounting manages finances based on individual projects.

Budget management in accounting for construction is also much more complex. Calculations in construction involve many variables, such as material prices, labor costs, and design changes. Therefore, construction accounting requires more detailed cost monitoring. On the other hand, general accounting does not require the same level of detail in recording day-to-day operational costs.

Finally, the method of recording contracts differs between the two. General accounting focuses more on the regular transactions of the company as a whole, while construction accounting records project contracts in detail, such as costs allocated, payments made, as well as contract changes that may occur.

Key Aspects of Construction Accounting that Make it Unique

One of the unique things that distinguishes construction accounting from regular accounting is the way revenue is recognized. In accounting for construction, revenue is recognized based on the percentage of project completion, so the company can record revenue along with the project. This is in contrast to ordinary accounting which tends to recognize revenue once the transaction is fully completed.

Construction accounting also focuses more on individual project management. Because each project has a budget that must be tracked separately. Construction accounting must ensure that every expense and revenue is recorded appropriately, so that financial management is more detailed and focused. 

Another uniqueness is in terms of financial reporting. Construction accounting often involves specialized reports that show financial progress per project, such as project cost reports that help project managers monitor the financial health of each project in real-time. 

Difficulties and Tips for Making Accurate Construction Accounting 

Although accounting for construction companies can indeed make it easier for management to manage finances, implementing construction accounting cannot be said to be easy. What are the difficulties that will be faced to make accounting for construction companies difficult to do? 

Here are the difficulties of implementing accounting for construction and tips on how to overcome them: 

1. Fluctuating income

You must be aware that the construction industry often faces volatile revenues as projects can run for a long time, with payments made in stages. These fluctuations make financial recording and cash flow difficult to predict, which can affect the company’s ability to manage its day-to-day finances.

How can we overcome this?

To overcome this challenge, it is important for companies to carefully plan their cash flow. One tip is to make monthly cash flow estimates based on project payment milestones. That way, companies can anticipate when revenue will come in and prepare emergency funds in case of payment delays.

2. Changes in project demand and specifications

Construction projects often experience mid-course specification changes, such as redesign or material changes. This affects the project budget and schedule, making it difficult for the accounting team to maintain accurate and up-to-date financial reports.

How can we overcome this?

To overcome this, construction companies need to be more flexible in budgeting. Make sure every project change is recorded in detail in the financial system. By using a accounting for construction company application that has an automatic update feature, any changes can be immediately reflected in the financial statements without having to repeat the calculation from the beginning.

3. Difficulty recording projects by stages

On construction projects, it is often the case that work is carried out in stages. Financial records must reflect the progress of the work, including the revenue received and costs incurred for each stage of the project. This difficulty is further increased when the project is protracted or split into many phases.

How can we overcome this?

One solution is to apply the percentage of completion method in the financial statements. This method allows companies to record revenue and costs based on the percentage of work completed, which makes the financial statements more accurate and in line with the actual progress of the project.

4. Constraints in managing construction tax

Construction projects have more complex tax requirements compared to other businesses. Apart from income tax, there are also material and subcontractor taxes that need to be managed. Mistakes in tax management can expose the company to fines or penalties.

How can we overcome this?

The solution is to ensure the finance team has a deep understanding of the tax regulations that apply in the construction sector. In addition, it is important to consult regularly with a tax consultant to ensure the company always complies with the latest regulations. By doing so, the risk of mistakes and potential fines can be avoided.

5. Complex project cost management

In accounting for construction companies, managing project costs can be challenging as it involves many aspects, such as materials, labor, equipment, and overhead costs. Differences in project duration and scale can also lead to costs that are difficult to predict, complicating real-time monitoring of project budgets.

How can we overcome this?

To overcome this, construction companies need to have a structured and detailed cost recording system. One example of a high-quality system that you can use is HashMicro’s accounting system. HashMicro’s system is one of the best accounting software Philippines and is designed to meet various accounting needs, one of which is accounting construction.

Furthermore, the HashMicro system also comes with a comprehensive range of features and extensive flexibility. One of the features offered is Multi Level Analytical. 

This feature provides insight into all financial transactions in real-time and can be filtered based on various categories. This helps management know the construction financial activities that involve various aspects, such as building materials, operational money, employee salaries, and others. 

Not only does HashMicro provide comprehensive features, it also provides a free demo that gives enthusiasts the opportunity to try and understand how the system works without being charged. 

Benefits of Using Construction Accounting Software 

Earlier, we mentioned that using an accounting system can help you with complex project cost management. However, is the function of the accounting system limited to that? Here are the benefits of using construction accounting software: 

• Improved Financial Accuracy: Construction accounting software helps record and track project costs in detail, thus minimizing recording errors. When this is integrated with effective business budgeting software, it ensures more accurate and transparent financial reports.
• Real-Time Monitoring of Project Costs: With accounting software, companies can monitor project expenses in real time, making it easier to control the budget. This helps avoid uncontrollable cost overruns.
• More Efficient Management of Multiple Projects: The accounting system enables the management of financial reports from multiple projects in a separate and organized manner. This makes it easier for companies to keep an eye on the financial performance of each project without confusion.
• Easier Compliance with Tax Regulations: Construction accounting systems make it easier for companies to comply with tax and audit regulations through more organized and complete reports. This reduces the risk of being penalized for tax or reporting errors.

Achieve Error-Free Construction Accounting with HashMicro System 

As we mentioned earlier, HashMicro accounting system is one of the best construction accounting software Philippines that you can use to be able to overcome the difficulties of working on accounting for construction companies. Yes, it has extensive customization options and integration with construction project management software, so it can meet all your construction-specific needs. 

The following are the features of the HashMicro accounting system that can help with accounting for construction: 

• Cash Flow Reports: Monitor the company’s cash inflows and outflows to ensure sufficient liquidity, make proper financial planning, and identify and address potential financial issues.

• Budget S Curve: This feature helps visualize the progress of project or budget expenditure in the form of an S curve.

• Financial Statement with Budget Comparison: Provides a clear picture of how the company’s actual financial performance matches the plan to identify deviations and make necessary adjustments to achieve financial goals.
• Forecast Budget: Predict future budgets based on historical data to help plan finances, allocate resources efficiently, and make better strategic decisions.

Also, the system has no limit on the number of users. What can you benefit from that? With no limit on the number of users, the accounting process in construction can be supervised by several people at once. This will increase the transparency of the construction accounting process. 

Conclusion

Accounting for construction is a branch of accounting that is specialized for construction activities only. This is because accounting for construction has accounting variables that are different from other general accounting processes. 

Because of these differences, accounting for construction also has its own difficulties. Where one way to overcome these difficulties is to use an accounting system, such as HashMicro’s Accounting System. 

HashMicro’s accounting system is specifically designed to meet various accounting needs. This also makes HashMicro’s accounting system have  wide scalability in order to always be able to keep up with various construction developments optimally. It can also be easily integrated with other systems, such as asset, facility management, and construction management software. 

Schedule a free demo to learn more about how this system can make your accounting for construction more efficient than ever!