Construction Business Management

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Accounting Methods and Procedures

At the heart of any construction business are its accounting methods and procedures. Here are a couple of issues you should discuss with your accountant.


Percentage of Completion Contract Reporting

This method recognizes income on a project as the job progresses. This is done by comparing the actual costs incurred with the estimated total contract costs. Current construction accounting software computes this automatically. This means that a portion of the profit on jobs that are not completed at year end will be reported in that year. This is the generally accepted method for reporting project income for financial statement purposes as well as for income taxes. For example if one of your projects is 80% complete at the end of the fiscal year based on expected costs, then 80% of the projected profit is reported in that year. The advantageous Completed Contract Method described next may be an exception that applies to you.


Completed Contract Method of Reporting

For income tax reporting there is a “Small Construction Contracts Exception” in the IRS code which allows the entire profit on each job to be reported in the year the contract is substantially completed. This means that if you qualify for this exception you can defer the entire profit on jobs that are open at year end. The obvious benefit is deferment of income tax on the open projects. A Small Construction Contract is generally one that is expected to be completed within a two-year period and is performed by a contractor whose average annual gross receipts for the three years preceding the year in which the contract is entered into do not exceed a certain annual limit (check with your CPA or the IRS for applicable amount.) It is perfectly legitimate to report income on uncompleted jobs on your financial statements while deferring it for income taxes if you qualify for this exception.

Consult with your outside CPA for details before implementing these methods and procedures.

The author of this article, Nick Ganaway, was a successful general contractor for 25 years. He is a consultant in Atlanta, Georgia for contractors and other small business owners. Nick has described how to set up and manage a construction business that is profitable, enjoyable, and enduring in his book Construction Business Management: What Every Construction Contractor, Builder & Subcontractor Needs to Know.


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