Common Construction Industry Specific Accounting Issues
THE JOB COST LEDGER
Construction accounting systems are typically organized into projects or “jobs” at the most detailed level and supported by what is known as a job cost ledger. This is essentially a detailed breakout of all costs that make up a construction project.
While there can be hundreds or even thousands of items in the job cost ledger they are usually grouped into five categories:
• Cost of Material
• Cost of Labor
• Cost of Subcontractors
• Cost of Equipment
• Cost of Other Expenses
These grouped items are ultimately posted to the income statement to derive gross profit.
INDIRECT COST ALLOCATION
While costs in the job cost ledger are known as direct costs because they wouldn’t exist without their associated project, construction businesses also incur many indirect expenses that are necessary in order to carry out operations.
Some of the most common indirect costs are related to equipment and include:
• Rental Fees
• Repairs and Maintenance
Indirect costs are typically allocated among jobs and the method used to do so should be consistently applied for every job. The most common approach is to use direct labor hours or direct project costs over time.
METHODS FOR RECOGNIZING
REVENUES AND COSTS
The percentage of completion and the completed contract method are two primary accounting methodologies used by construction businesses to recognize when revenues and costs will show up on the income statement.
1. The percentage of completion method allows for the recognition of project costs and revenues over time depending on the amount of project completion. It can be evaluated by either the cost to cost method, the e orts expended method or the units of work performed method. Percentage of completion should only be used when it is reasonably possible to measure project completeness on an ongoing basis.
2. The completed contract method is much simpler. In essence, all revenue and profit are recognized only when the project is complete. This method should be used when it is uncertain that funds will be collected from a client under contract terms.
It should be noted that both accounting methodologies both yield the same revenue and profit at the end of a project. The only difference is timing.