Construction Accounting

 

Progress Billings

A series of invoices prepared at different stages in the process of a major project, in order to seek payment for the percentage of work that has been completed so far. 

Progress billing will show the original contract amount, any changes to that amount, how much has been paid to date, what percentage of the job has been completed to date, what payment is currently due and the total amount remaining to be paid by the project’s completion. Progress billing is common in the construction industry.

For example, in the construction business, the client or recipient of the finished project does not want to pay for the entire job up front because it is an expensive, long-term task with the potential for many financial miscalculations along the way.

The construction company does not want to wait to be paid until the project is completed because it needs to pay its employees and purchase materials as the project is carried out.

Progress billings meets the needs of both the construction company and its client by providing for payment at several stages during the process.

Construction Accounting

Construction accounting is a form of project accounting applied to construction projects. See also production accounting.

Construction accounting is a vitally necessary form of accounting, especially when multiple contracts come into play.

The construction field uses many terms not used in other forms of accounting, such as draw and progress billing.

Construction accounting may also need to account for vehicles and equipment, which may or may not be owned by the company as a fixed asset.

Construction accounting requires invoicing and vendor payment, more or less as to the amount of business done.

Revenue Recognition

Construction accounting requires unique revenue recognition rules for contracts in progress.
In most cases, revenue is recognized using the Percentage of Completion Method. Under this method, revenue is recognized using an estimate for the overall anticipated profit for a particular contract multiplied by the estimated percent complete of that contract. This involves the inherent risk of relying upon estimates.

Under SOP 81-1, revenue is also allowed to be computed using the Completed Contract Method. Under this method, contract revenues and costs are not recognized until the contract is substantially complete. However, this method is not allowable if the results are significantly different than results using the Percentage of Completion Method The Completed Contract Method is allowed in circumstances in which reasonable estimates cannot be determined. However, these types of circumstances can be construed as a lack of internal control.