If you are thinking of taking a step forward in the construction industry or already having a business that operates in this industry, then you should hire an accountant who understands the accounting of the construction industry.
Construction is an industry like no other.
Why? Because the construction industry contains various moving parts and projects that can last for weeks to years instead of having a simple buy and sell model. It is also one of the largest industry on the planet; it is expected that the industry will be worth over $15.5 trillion by 2030.
In the construction business, it is not easy to determine who paid when and neither how much nor how much tax due by when; that’s where a specialist construction accountant comes into the spotlight.
This blog post is divided into the following sections
- What is construction accounting?
- A quick highlight – nuances of construction accounting
- What is the difference between regular accounting and construction accounting?
- Benefits of having a construction accountant
- How to choose a good construction accountant for your business?
- Final Thought
What is construction accounting?
Let’s say a typical business such as a grocery store or restaurant uses general accounting principles as this model works perfectly for such businesses – doing business from the fixed location.
Such business understands the cost of the items it sells overhead is kept relatively constant.
On the other hand, the construction business does customise work in novel destinations that are usually remote.
That’s why; construction businesses must consider totally different types of costs that include.
- Travel time
- Mobilisation costs such as packing tools and equipment
- Delivery of materials to the construction site
- Clearing the project site of excess materials once a project is completed
- Fixed costs contract or percentage completion method of accounting
In short, the construction business does not have a fixed site, and it is moved to wherever the customer needs it, along with all the necessary construction materials.
This can end up in various indirect costs that must be considered when looking at the financial statements.
In addition, there are various unique regulations that contractors in the construction industry have to manage, including.
- The Construction Industry Scheme (CIS)
- The VAT reverses charge – from 1 March 2021
All these unique challenges have only one solution – Construction Accounting.
Construction accounting uses different principles compared to the general form of accounting in order to be certain that people get paid the right amount at the right time, and the owner gets the most out of the construction business.
Also, visit our blog post explaining what is checking account.
A quick highlight – nuances of construction accounting
- No fixed business structure
If you visit 3 construction sites one by one in London, then you’ll find each of them structured a little differently.
That’s why your construction accountant has to understand the intricacies of each project individually.
- Workers are mainly contractors
In the construction business, every person, including labourers to site managers, is likely to be contracted workers, some of whom hire their own sub-contractors to work onsite with them.
Many of them are working on multiple projects simultaneously, spending several hours a day on each construction site.
With all these dynamics at play for every single worker, it can make payroll a huge nightmare.
- The workers are not the same people, always
On construction sites, temporary workers come and go, so payroll can change daily to weekly.
On construction sites, staffing is very fluid and often confusing, so you must employ a construction accountant.
- More regular maintenance required in construction accounting
Due to the fast-paced behaviour of the construction business, expense reviews, employee information, cash flow analyses, and invoices need to be reviewed once a week.
What is the difference between regular accounting and construction accounting?
Either you are laying the bricks or keeping the books, it is essential to understand that construction accounting is different from the regular one.
General business account for sales usually offers 1 to 5 categories of products and services.
Construction businesses offer verities of service categories –
- Service work,
- Labour costs,
- Physical products
- Materials, and more.
It will be harder to keep track of profit coming from each category with all of these service categories or every expense related to it.
Cost of goods sold
General businesses accounting simply record the cost of the product sold.
But when it comes to construction accounting, it is not so straight forward.
Each construction project incurs both direct and indirect costs that can fall into hundreds of categories.
Keeping track of all these direct and indirect costs can be hard, specifically when they are coming from all different categories.
In general business accounting, the distinction between the Cost of Goods Sold and Overhead is very clear, but the case is different in construction accounting.
For example, many of the items a grocery store would call “Overhead” can fall into the “Cost of Goods Sold” category for construction business because they are directly connected to the customer’s project.
When it comes to construction accounting, it is important to know the distinction between these two because it can be tricky.
The direct relation between income and expenses makes it very easy to calculate breakeven points in regular businesses.
However, there are many categories of items to easily understand how to break even on a project when it comes to the construction business.
In addition, in construction accounting, many projects are one-of-a-kind custom jobs, with intricate requirements and a variety of related costs.
Benefits of having a construction accountant
You cannot run a successful construction business without keeping the bank manager and the taxman happy.
The only way you can do this is if you hire a construction accountant.
So, here are some key areas in which you will benefit by working with a construction accountant.
Help you avoid the cash-flow trap
If you have a smaller construction business, the cash-flow trap could spell the end of your business if you handle it carelessly.
If you are paying large amounts of money from your construction business capital upfront without the revenue streams in place to recover it, you could land your business into serious debt.
An experienced construction accountant will help you make sure you avoid the cash-flow trap and mitigate all the risks.
Help you reduce expenses
Expenses arise within all the business, but especially with construction because of various locations, crew, equipment and staff can increase variable and fixed costs.
An experienced construction accountant can help you outline and minimise all the expenses such as mileage, deliveries, travel time, new materials, cleaning, etc. and make sure you not only maximise the bottom line but budget correctly for any future projects and business growth.
Help you with taxes
Current tax laws, regulations and future legislation can have a large impact on any construction business.
For example, your annual corporation tax liabilities will be properly calculated and declared
Guidance from a construction accountant could help you minimise your current and future tax liabilities.
Peace of mind
You probably need to look after the construction business and its dynamics, and at the same time, doing accounting is stressful.
But a construction accountant on hand will help you get peace of mind by keeping you informed with all the latest legislation and giving you the freedom to utilise your area of expertise to grow your business.
Also, visit our blog post what is financial accounting to know financial accounting in details.
How to choose a good construction accountant for your business?
In order to manage the finance part of your construction business, you will need the best construction accountant.
If you are going to hire a professional to handle your finance, then you need someone who can make you feel confident that your accounts on safe hands.
It’s a fact that the entire procedure of hiring an accountant is time-consuming and complicated for a construction business owner because of the numbers of running works at the same time.
When you hire, find a construction accountant who is chartered through recognised organisations like the Institiue of Financial Accountants (IFA), Association of Chartered Certified Accountants (ACCA), Institute of Chartered Accountants in England and Wales (ICAEW) or similar bodies, which indicates that they are having a high level of expertise and skill.
It’s also essential to choose someone with forward-thinking, to make sure they are keeping up with the latest developments and technology.
The UK government has launched the Making Tax Digital (MTD) scheme to make HMRC digitally advanced, which makes it necessary to be tech-savvy.
Also, it’s worthwhile asking which software your potential accountants use, as these technologies are helpful in giving you oversight of your accounts on the go.
Construction accounting relies on different methodologies to track costs and revenue, and each project has set indirect & direct costs associated with it. That’s why a specialist construction accountant is the best thing you can do for your business.
Make sure that you are hiring the right people who have formal education in accounting and, preferably, some experience in construction accounting. Even one or two years of experience in this area can make all the difference for your construction business.