Construction is an industry like no other. Instead of working on a simple buy and sell model, it has lots of moving parts – and projects can last for years. It isn’t easy to determine who gets paid when, and by how much, nor how much tax is due by when. That’s where specialist construction accounting comes in.
What is construction accounting?
Accounting is a necessary part of running any business. It’s how you see where money is coming in and where money is going out. But for construction, the story is a bit more complex.
Projects last months or even years before they’re delivered and payment terms are more complicated. Contractors in the construction industry also have to manage unique regulations, such as the Construction Industry Scheme (CIS) and the VAT reverse charge (from 1 March 2021).
Construction accounting is the answer to this challenge. The industry uses different principles to other forms of accounting to make sure people get paid the right amount at the right time.
What’s the difference between construction accounting and normal accounting?
Traditional accounting is based on straightforward principles. Broadly speaking, products and services are sold from set locations and are delivered in a fairly short time period of no more than a few months. Therefore, normal accounting tracks assets and liabilities.
It’s not as straightforward in the construction industry. Every project has lots of moving parts and the end date is flexible. People are often contracted or sub-contracted to work on projects, and they may work on a few projects at the same time. That’s not all. Overhead costs can also vary, equipment moves between sites, and you need to take into account general costs like insurance and project management.
Construction accounting considers all these aspects of the job. You usually set up a separate activity for each project and allot costs to it. When you allocate those costs depends on which method you follow:
- Accrual – income and expenses are assigned when they are accrued, rather than paid. This method is often chosen for large projects that last a long time, with accounts based on the percentage of the work that’s been completed.
- Cash – income and expenses are allotted when they are paid. Smaller construction firms are likely to go down this route.
Do I need a professional to do construction accounting or can I do it DIY?
There are no laws to stop you carrying out construction accounting yourself. You will, however, run into a lot of trouble if you making mistakes paying taxes, wages or suppliers. Few people in the construction industry have the time to do accounting as well as their day job, and fewer still have the expertise. Construction accounting is a specialised area, and it’s vital to get it right to ensure you’re paying tax correctly and managing cash flow properly.
Having said that, there are various software solutions out there that will help you keep track of each project’s finances. As well as taking care of your billing and invoices, they can also give you an overview of important reports like your profit and loss sheet and cash flow statements.
What are the best construction accounting software tools?
If you’re thinking of using construction accounting software, you’ll need to do a fair amount of shopping around for the tools that answer your needs. Here are some popular options:
- Sage – This giant in the accounting software world has products designed for construction firms. If you want the backing of a name you can trust, Sage could be a good option for you.
- Xero – Xero offers solutions geared towards smaller construction firms. All kinds of tradespeople use it, including plasterers, plumbers and carpenters, as well as builders.
- Procore – Procore specialises in construction accounting. It offers solutions for preconstruction calculations, project management, resource management and financials.
What should I look for in a good construction accountant?
Lots of building firms and tradespeople look to accountants to manage the finance side of their business. It is understandable why, given that the process can be complicated and contractors are usually busy undertaking projects.
If you’re going to pay a professional to do this work, you need to feel confident that they know what they’re doing. You could choose one who is chartered through recognised membership organisations like the Institute of Chartered Accountants in England and Wales (ICAEW), which indicates that they’re reached a high level of expertise and skill.
It’s also important to choose accountants who are forward-thinking, to ensure they are keeping up with the latest developments. The government has introduced the Making Tax Digital scheme to make HMRC digitally advanced. In response, lots of accountants are offering software and cloud-based systems that help firms stay ahead with digital capabilities. It’s worthwhile asking which programs/apps your potential accountants use, as these technologies are helpful in giving you oversight of your accounts on the go.
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