Toward the end of the year, construction CFOs are preparing for the next year and establishing a budget, which can of course come with certain challenges. To make accounting easier for professionals in this industry, there are some best practices to implement during this time. This article reviews these best practices and how CFOs can use them to align resources for budget planning and more.
Construction companies frequently balance multiple construction projects of varying scope. As a result, they may have a hard time matching income sources with costs. However, job costing can help keep track of expenses for each transaction throughout each project, including both direct and indirect costs and income. For instance, job costing can be used to track physical completion in units, labor used in hours, and dollar costs faced. This provides CFOs with ample information about projects to gauge profitability while also helping prepare their company’s taxes. By the end of the year, this will provide a clear idea of how much each project both cost and earned, which can help in preparing for the upcoming year.
This simple accounting method enables accountants to keep track of when they pay expenses and receive revenue, and it's one of the most efficient techniques to use in the industry. However, accountants will still need to evenly distribute expenses throughout the benefit period for contracts that go beyond a single year. Also, CFOs won't be able to use this method if job materials account for over 15% of the customer's costs- unless their company earns less than $1 million in annual income.
Using the completed contract method, accountants won't report contract income or expenses until the completion of the project. While contractors can still bill during this time and expenses can accumulate during construction, this method simply means that profit won't become official until the project finishes. In other words, all income and expenses will appear in a single statement. Subsequently, contractors may be able to defer taxable revenue if it appears the contract won't be completed before the next tax year. On the other hand, the IRS requires contractors using this method to remain under a maximum revenue limit, similar to the cash basis accounting method. They must also be able to complete the contract within a specific amount of time.
The percentage of completion method enables construction companies to match costs and revenue, which is often otherwise challenging because of the high volume and varying scope of different projects. Contractors can use this method to confirm whether a particular project is likely to result in gained or lost income. They can calculate this by dividing the total actual expenses of a job by the total estimated expenses, followed by multiplying the estimated income by the completion percentage, which will give contractors the estimated gross profit. The result is an accurate way to track the profitability throughout a project.
Technology is a CFO’s best friend in the 21st century. By implementing software that can assist in budgeting and forecasting the year ahead, teams can work quicker and with more accuracy. Consider every user and then adopt a platform, like a CPM, that assists in forecasting while adding an automated boost to make the end-of-year period run smoother than ever.
Businesses that incorporate any of these accounting methods are able to effectively and efficiently keep track of all projects and jobs. Thanks to forward planning, taxes and budgets are sufficiently prepared for the next year when making end-of-year calculations and estimates. In turn, businesses can benefit from increased profitability with optimized operations based on each year's performance.
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