What is Job Costing?

For most businesses, the accounting general ledger (G/L) is all they need. This lets them track transactions that impact the whole company’s financial picture. However, because construction accounting is project-centered and production is de-centralized, contractors also need a way to track and report transactions specific to each job. That’s job costing. Job costing is the practice in construction accounting of tracking costs to particular projects and production activities.

WHAT IS RETAINAGE?

Another peculiarity to be accounted for in construction is the practice of withholding retainage, or, retention. Retainage is the predetermined amount of money an owner may hold back from payment until they’re satisfied with contract completion. A common retention amount might be 5-10% of the contract value or invoiced amount, but it can be less or more. The idea of retention is to provide the customer with some security against any deficiencies or defects on the project.

what is revenue recognition

Revenue recognition or income recognition is how a contractor determines when they’ve officially made money on a project. It also helps determine when they should officially record an expense. Remember, this comes into play because construction contracts are usually long-term and often have delayed payments. Contractors aren’t necessarily able to complete, bill and collect on a contract in the same month. In fact, for many contractors, this never happens.

That leaves contractors and construction accountants with a choice of revenue recognition method. The method they choose will determine when income and expenses “count.” In some cases, they might use one method for their own bookkeeping and one for tax reporting, as long as they remain consistent over time. In construction accounting, the main options have traditionally included cash-basis, completed contract and percentage of completion. However, contractors now have to consider guidance from the new ASC 606 revenue recognition standards with their construction CPA.

Construction Payroll

Finally, with multiple profit centers and decentralized production, plus rigorous compliance requirements, construction also sees some of the more unique and complex payrolls.

CERTIFIED PAYROLL & PREVAILING WAGE

In some sense, prevailing wage payroll is like a minimum wage but more complex. First, prevailing wage payroll may include and sometimes requires non-cash compensation called “fringe benefits,” such as health care or continuing education. Second, the prevailing wage rate will vary not just by area but also specific worker classification.

UNION PAYROLL & REPORTING

Union contractors face a similar situation as prevailing-wage contractors. Where certified payroll typically tracks wage and fringe obligations for government agencies, union payroll needs to track and report wage and fringe obligations to the union local.

 Specialized Construction Billing

Many industries operate around fixed-price, point-of-sale billing, but that’s not always the case with construction. Because construction production is project-based, decentralized and long-term, contractors may use a number of billing styles and methods. Often that requires specialized software to track and create those billings. Let’s look at just a few contract types and billing formats.

FIXED PRICE

Also known as a lump-sum contract, fixed price billing is based on a detailed estimate that gives a total cost for the entire project. It can also be considered in two types: fixed-price hard bid and fixed-price negotiated. A hard bid essentially says, “No matter what, we’re building it for this amount of money.” As a result, the risk is heavily on the contractor rather than the owner. If there are any overruns because of changed site conditions or input costs, that falls on the contractor. A negotiated lump sum, on the other hand, might allow for some contingencies and unforeseen events.

Billing a fixed-price contract often happens on a percentage-of-completion basis with retainage withheld.

TIME & MATERIAL

Time-and-material billing bases the contract price on a per-hour labor rate plus the cost of materials used. For both the labor and materials components, the contractor may apply a standard markup. This builds their profit percentage into the amount and accounts for the cost of overhead.

For example, an HVAC technician paid at $20 an hour might be billed at a fixed $50 per hour. Additionally, the equipment they install might follow a standard markup table by item or price, such as “2x” for a disposable air filter. If the technician spent two hours on the dispatch and additionally replaced a $20 air filter, the contractor would bill the customer $100 for labor plus $40 for materials.

UNIT PRICE

Under a unit-price contract, the contractor bills a customer at a fixed price-per-unit rate. Typically, this will be useful if they aren’t able to estimate the unit production for the project with a lot of certainty. Unit-price billing is especially common among heavy-highway and utility construction companies.

With unit price, risk tends to be shared between the contractor and customer, since production quantities can end up higher than estimated. As long as they’ve estimated the unit pricing correctly, the contractor may increase their revenue in this case. Otherwise, if unit pricing is off, they stand to lose money.

AIA PROGRESS BILLING

AIA billing invoices the customer based on the percentage of work completed for that billing period. This invoice generally consists of a signed summary sheet, followed by a schedule of values that details what’s been completed and billed to date.

Together, these documents are considered an “application” for payment, because the recipient will have a chance to review the schedule of values and either accept or dispute the billed amount.