When to use it: Fixed-price contracts are usually favorable for projects that have a clear scope and defined schedule. It is generally most feasible with projects that have defined stages or milestones toward completion.Ī fixed-price (or lump-sum) contract is based on a detailed estimate and establishes a total price upfront for an entire construction project. When to use it: Progress billing is especially beneficial for large and/or government-funded projects. The process involves using official forms produced by the AIA. For example, you may want to invoice 25% of a project’s contracted amount once you complete 25% of the work. Below, we explore a few of the most common:Ĭreated by the American Institute of Architects (AIA), progress billing is a standardized way to invoice periodically throughout a project, based on the percentage of work completed. Billing for Construction Projectsīecause construction is project-based and those projects can span long periods of time, subcontractors use a number of billing methods. This allows them to better predict and manage their cash flow. To address this issue, some contractors pursue material financing, so they can acquire the materials they need immediately but spread out payments across several months, or until they’re paid for the work. Subcontractors often have to purchase materials with their own funds, before they receive payment for the work completed. Materials are a common source of cash flow problems. If you don’t properly account for the cash you have coming in and going out of your business, you can easily find yourself in a position where you don’t have the ability to pay subcontractors or suppliers or confidently take on new projects. Construction projects can span months or even years, and payments for those projects stretch out across those timeframes, too. Cash Flow and FinancingĬash flow monitoring is a critical aspect of construction accounting, as well. One thing to note: The IRS does allow a company to exclude retainage from revenue recognition (in order to save on income taxes) until an unconditional right to receive it has been established. However, if retainage in a contract can be withheld over a year, it may need to be recorded as a long-term asset, as opposed to a short-term receivable. ![]() Retainage, once withheld, can be recorded as revenue on the income statement and therefore added as a receivable on the balance sheet. Retainage is very common on commercial construction projects, and it’s important to understand how retainage flows into your accounting books. Therefore, maintaining an accurate schedule of values is essential. For this method to work, there must be straightforward ways to assess the percentage of the project completed. This method calculates the continuous revenue and expenses related to longer-duration projects, based on how much work has been completed. The second, and more common way to recognize revenue, is the percentage of completion method. This method is used when it’s tough to calculate the percentage of the project completed, when there are inherent barriers that may impact the completion of a project, or when the project is very short-term in nature. ![]() The first is the completed contract method, in which revenue is only recognized when the work is completed. There are two common methods for recognizing revenue in construction accounting. Most costs are assigned to materials and labor, with some additional costs including project-specific insurance, equipment, or other project-related expenses, as well as soft costs. In your accounting system, each job is created with a unique code, and revenues and costs are assigned to the project using that code. In construction accounting, you record revenue and costs against each unique job, which ultimately allows you to track the profitability of each project. What Subs Need To Know About Construction Accounting Issues Up the Payment Chain Can Cause Payment Delays. ![]()
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