The construction industry operates uniquely from many other sectors, which means that its accountancy requires a considered approach. Construction projects can run for months or even years, costs fluctuate throughout a build, and payments are often received in stages rather than all at once.
As a result, construction accounting requires a more detailed approach than standard bookkeeping. So, having an understanding of how to accurately track project costs and manage progress billing can make a significant difference to your business’ cash flow, profitability, and long-term growth.
In this guide from Kirkwood Wilson, we’ll explore what construction accounting is, its key considerations, and how a modern approach with the right construction accountants can help to make managing your finances all the simpler.
What Is Construction Accounting?
Construction accounting is a specialised area of accounting that covers the complex requirements of contractors, subcontractors, developers and construction businesses. Unlike many industries where products are sold immediately, construction projects instead involve many fluctuating aspects, such as ongoing costs, staged payments, subcontractor management, and complex tax requirements. As opposed to a retail store with a fixed point of sale, construction involves “portable” workplaces and projects that span months or years.
With all this in mind, those involved in construction need to have processes and systems in palce that provide visibility over both their projects’ performance and their overall financial health. With the right accountancy practices in place, construction accountancy can help to:
- Monitor project profitability
- Manage cash flow
- Track labour and material costs
- Meet HMRC compliance requirements
- Forecast future performance
- Make informed business decisions
Understanding Job Costing
Job costing is one of the main considerations for construction accounting and involves assigning every cost associated with a project to a specific job. Rather than viewing business expenses as a single pool of costs, job costing allows construction businesses to understand exactly how much each project costs and whether it is profitable. The typical job costs for projects within the construction industry include:
Labour
Labour costs include employee wages, subcontractor payments, overtime, employer contributions, and any other costs associated with a project’s workforce.
Materials
The building materials required for a project often make up one of its highest costs. As a result, tracking them accurately helps to identify any waste, pricing issues, and budget overruns.
Equipment
The costs of plant hire, machinery, fuel, and maintenance all should be allocated to the relevant project.
Overheads
Some indirect costs incurred, such as site management, insurance, or temporary facilities, may also need to be assigned proportionately to projects.
Why Is Job Costing Important?
Without accurate job costing, it can be difficult for construction businesses to determine whether a project is genuinely profitable. A project may appear successful because payments are being received regularly, but if the labour costs exceed estimates or material prices increase unexpectedly, profit margins can be significantly reduced.
Having good job costing in place allows construction businesses to make much wiser, well-informed business decisions and can significantly help with the following:
- Compare estimated costs against actual costs
- Identify profitable project types
- Improve future quotations and tenders
- Spot overspending early
- Increase overall profitability
What Is Progress Billing?
Unlike many industries, construction businesses rarely involve invoicing clients for the entire project upfront. Instead, invoices are typically raised at agreed milestones throughout the project. This is known as progress billing.
This process allows contractors to recover costs as work is completed rather than waiting until the end of the project to receive payment, given the variability in construction project lengths. Each payment reflects the percentage of work completed at a particular stage, with examples of these progress billing stages including:
- Completion of groundwork
- Structural completion
- First fix installation
- Practical completion
The Benefits of Progress Billing
Improved Cash Flow
Construction projects often require significant upfront expenditure with the costs of labour, materials and subcontractors. As such, progress billing helps maintain a healthy cash flow throughout a project’s lifecycle.
Reduced Financial Risk
Receiving payments at key project milestones helps to reduce the risk of carrying substantial costs before any revenue is collected.
Greater Transparency
Clients are able to clearly see what work has been completed and how payments relate to a project’s progress.
Easier Project Management
Having regular billing points encourages ongoing project reviews and financial monitoring.
Common Challenges Construction Businesses Face
Even experienced contractors can encounter accounting challenges when managing multiple projects simultaneously. Some of the most common issues that those involved in construction can face with their accountancy include:
Inaccurate Cost Tracking
If expenses are not allocated correctly, a project’s profitability can become unclear pretty quickly.
Cash Flow Pressures
Any delays in client payments can create difficulties when meeting payroll, supplier, and subcontractor obligations.
CIS Compliance
The Construction Industry Scheme (CIS) requires contractors to deduct tax from subcontractor payments and submit accurate returns to HMRC. Any mistakes that are made in these returns can lead to penalties and unnecessary administrative burdens.
VAT Complexity
The construction sector has additional VAT considerations, including the Domestic Reverse Charge, which can create confusion without the right guidance.
Limited Financial Visibility
Without up-to-date management information, business owners may struggle to understand how projects and the wider business are performing.
The Importance of Good Digital Accounting Practice for Construction
Modern accounting processes and software have transformed how construction businesses can manage their finances, offering much clearer visibility over costs, cash flow, and project performance.
With the right systems and support in place, businesses can track project costs in real time, monitor profitability across multiple jobs, manage CIS deductions, simplify VAT reporting, and produce accurate management accounts – all with ease.
At Kirkwood Wilson, we support construction businesses with bookkeeping services, payroll accounting, VAT returns, CIS administration, management accounts, and digital accounting software solutions. By keeping your financial records accurate and up to date, we help to reduce your manual administration, strengthen your reporting, and help you to make much more informed business decisions.
Professional Construction Accounting Support at Kirkwood Wilson
With our chartered accountants having many years of experience within construction accounting, we’re able to wholly manage and streamline your management processes as trusted construction accountants. With our diverse range of services, we can give you peace of mind by effectively managing your finances and give you time to focus on the important things.
If you’d like to find out more about the construction accounting services for businesses we can provide and how they can help yours, a member of our team will be more than happy to discuss this with you when you contact us.
