Keeping Up With Compliance: 2025 Accounting Best Practices For Contractors

Unlike traditional accounting, construction accounting treats each project as a unique profit center. These practices include using job costing, tracking committed costs, understanding margin vs. markup, and running frequent Work in Progress (WIP) reports. Change orders must be managed through formal documentation processes that alter scope, budgets, or timelines, ensuring all changes are approved and reflected in project financials. Revenue recognition must comply with ASC 606 standards, which fundamentally changed how construction contract revenue is recognized, requiring detailed contract analysis, performance obligation identification, and transaction price allocation. They integrate seamlessly with financial software to synchronize project data, transactions, and reporting. These reports help project managers make informed decisions about resource allocation, identify potential problems early, and ensure projects remain financially viable throughout their duration.

In the Completed Contract Method (CCM), revenue and expenses are only recognized on the books when a project is complete. If you don’t track income and costs closely, it might be difficult to tell whether you made any money once the project is finished. Construction accounting is different from regular accounting in a variety of other ways as well, including the way costs are tracked, how customers are billed, how payroll is run, and how compliance is managed. This is in sharp contrast to the time-based method common in regular accounting. In construction accounting, invoicing is milestone-based. Construction jobs are often fluid, and the scope of work can sometimes change mid-project.

Insufficient contract cost estimates in construction accounting

The choice depends on project duration, size, and regulatory requirements. Foster a culture where employees are encouraged to ask questions and seek guidance on financial matters to ensure accurate reporting. This leads to better accuracy, more timely reporting, and fewer administrative errors. Recognizing and addressing these challenges is essential for maintaining profitability and ensuring successful project outcomes.

For Medium-Sized Companies (Revenue: $7 Million to $50 Million)

But, larger companies must use accrual-basis accounting depending on their revenue. With cash-basis, you record your revenues when they’re received and any expenses when they’re paid. Here are some of the best practices you can use for construction accounting. You want to accurately divide indirect and direct project costs. There are a lot of moving parts that go into construction accounting.

A WIP report helps you understand whether you have over or under-billed for an ongoing job. Nearly half of all small businesses, however, do not currently employ an accountant or bookkeeper. Alek Grinberg is the Head of Growth Marketing at Coast, where he partners with fleet and transportation businesses to help them scale through smarter go-to-market and marketing strategies. To learn more about how Coast can help with all your accounting needs, visit CoastPay.com. Tracking receipts, coding expenses, and reconciling accounts can slow you down.

Tips for Handling Your Construction Accounting Processes

Once a contractor does have a right to it, after satisfactory contract completion, the contractor issues an invoice for it and moves it from the asset account to 8 key construction accounting best practices for contractors the A/R account for collection. The idea of retention is to provide the customer with some security against any deficiencies or defects in the project. And while private companies don’t have a formal obligation to use GAAP, many choose to follow its best practices. As of December 2018, all companies reporting under GAAP need to follow ASC 606. GAAP provides best-practice accounting standards across all U.S. industries. In other words, it tracks how money “accrues,” or accumulates, in holding before it moves as cash.

• For both the labor and materials components, the contractor may apply a standard markup.
• This makes it difficult to gauge whether a project is profitable, or is losing money.
• Job costing sounds complex, but there are accounting software tools to make it more manageable.
• Not only does it lead to increased profitability, but it also contributes to better decision-making, compliance, customer satisfaction, and holistic project management.
• However, you can take a “completed contract” approach as well, which involves calculating taxes owed on each contract.

If you want to practice the 8 times table against the clock, you can of course take the speed test. This is where you can practice your 8 times table. If you got all the answers right, practice the 8 times table shuffled in random order. If you think you remember them it’s time to test your knowledge at step 1b.

Construction Accounting vs. Regular Accounting

Construction accounting is a vital discipline that extends beyond the traditional bounds of financial management. Contractors can effortlessly monitor costs, labor, time and inventory levels by using various cost-tracking tools included in the system. Effectively managing finances and resources plays a pivotal role in completing projects on time while also meeting profit margins.

Analyze Financial Reporting At Least Once A Month

In 2025, accounting software also provides predictive analysis, using AI to identify potential issues before they occur, giving contractors an edge in proactive project management. By providing a detailed breakdown of expenses and comparing actual costs to budgeted amounts, they allow construction companies to monitor budget adherence and make real-time adjustments. It offers a clear picture of ongoing expenses and cumulative revenues, enabling construction companies to assess project profitability and detect potential financial risks early. The CIP Report tracks the financial data of projects still in progress, including costs and revenues.

Why Does Financial Reporting Matter?

With the US construction market expected to grow by 12% in 2025, adopting efficient accounting practices is crucial for companies looking to stay competitive and financially resilient. It ensures that cost management is accurate, revenue recognition aligns with project milestones, and regulatory compliance is maintained across the board. As we move into 2025, construction accounting is going through profound transformation driven by technological advancements, the growing focus on sustainability, and an evolving industry landscape. Given the complexities of construction accounting, these financial teams need as much control and visibility as they can get in their financial operations.

The most important thing for contractors, whether experienced in the construction industry or just starting out, is to have help. Construction accounting methods have a steep learning curve, but you can climb it and put your company in a better financial position. Among other areas of guidance, these standards help contractors identify whether they should recognize revenue on their books at a single point in time (as with CCM) or over time (as with PCM). The percentage of completion method (PCM) allows a contractor to recognize revenue as they earn it over time. To be eligible, contractors can’t exceed a certain average annual revenue, and their contracts must be able to be completed within a set timeframe.

All contractors should consider ASC 606 revenue recognition standards with their construction CPA by all contractors. Ultimately, the goal is to allow contractors to determine actual costs and profitability. As a result, there are special considerations for tracking, reporting, revenue recognition, collection and cash flow strategies, and cash management in construction.

• Overheads may consist of office expenses, insurance, maintenance, and training.
• While there isn’t a “one-size-fits-all” solution, considering your firm’s size, resources, business and technical requirements can guide your decision.
• Enterprise-level construction companies need robust software that can manage vast operations, complex projects, and extensive financials.

Project Profitability Blind SpotsGeneral contractors often overlook financial management during project execution, leading to unexpected losses and lost earning opportunities. In the fast-paced construction field, disregarding financial details can negatively impact project profitability, leading to unanticipated losses and endangering both projects and a contractor’s success. Construction accounting software helps businesses mitigate management burdens, ease financial reporting, and enhance ROI and profitability. It is highly recommended for construction companies to get professional expertise and comprehensible software to manage labor, material, and overhead costs within budget.

In the percentage of completion method (PCM), companies can recognize revenue as it’s earned throughout the lifetime of a contract. The completed contract method is not compliant with the Generally Accepted Accounting Principles (GAAP), which means it isn’t suitable for all companies and projects. The completed contract method is generally reserved for smaller projects, such as home construction. In the completed contract method (CCM), revenue and expenses are recognized only once the project is fully completed.

Construction accountants help their clients to be compliant with both industry regulations and tax rules. Consider factors like industry alignment, integration capabilities, pricing, scalability, reporting features, and compliance support when making selections. Medium-sized companies ($7-50 million) need solutions like Sage 100 Contractor, Viewpoint Spectrum, Sage Intacct, Sage 300 CRE, Foundation Software, or CMiC that balance ease of use with advanced features. Unit Price Billing charges based on completed quantifiable units, useful for repetitive work like road construction.

As a result, contractors in multiple jurisdictions have to watch out for double taxation. Prevailing wage legislation requires contractors to pay the rate of compensation that’s standard, or “prevails,” for each worker classification on similar jobs in the area. Construction payroll systems must be able to handle these complex payroll scenarios, and many contractors use specialized payroll software to manage their payroll needs. If there are any overruns because of changed site conditions or input costs, it falls on the contractor.