{"id":9516,"date":"2021-04-29T10:00:32","date_gmt":"2021-04-29T09:00:32","guid":{"rendered":"https:\/\/www.sage.com\/en-gb\/blog\/?p=9516"},"modified":"2026-01-29T09:45:37","modified_gmt":"2026-01-29T09:45:37","slug":"construction-accounting-comprehensive-guide","status":"publish","type":"post","link":"https:\/\/www.sage.com\/en-gb\/blog\/construction-accounting-comprehensive-guide\/","title":{"rendered":"How to do construction accounting: Your comprehensive guide"},"content":{"rendered":"
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\n\t\t\t\t\t\tHow to do construction accounting: Your comprehensive guide\t\t\t\t\t<\/h1>\n\t\t\t\t<\/div>\n\n\t\t\t\t\t\t\t\t\t

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\n\t\t\t\n\t\t\t\t\"\"\t\t\t\tKeir Thomas-Bryant<\/span>\n\t\t\t<\/a>\n\n\t\t\t\t\t<\/div>\n\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t<\/div>\n<\/div>\n\n\n\n

There are so many tasks on a building site that few people have time to take a special interest in construction accounting.<\/p>\n\n\n\n

But taking control of construction business finances is vital not only for a healthy business today, but plays a part in empowering sustained growth in the long term.<\/p>\n\n\n\n

Whether you’re looking to learn about architect accounting or accounting for builders, this blog serves as a construction company accounting guide.<\/p>\n\n\n\n

It explains in simple terms how to do construction accounting in all its forms, and it answers the fundamental question: what is construction accounting?<\/p>\n\n\n\n

Here’s what this article covers:<\/p>\n\n\n\n

How is construction accounting different from accounting principles?<\/a><\/p>\n\n\n\n

How to prepare a final account in construction<\/a><\/p>\n\n\n\n

Frequently asked questions about construction accounting<\/a><\/p>\n\n\n\n

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Download your free guide, Taking the confusion out of construction accounting<\/a><\/div>\n<\/div>\n\n\n\n

How is construction accounting different from accounting principles?<\/h2>\n\n\n\n

Basic business accounting is fundamentally about profit and loss, and ensuring a healthy cash flow.<\/p>\n\n\n\n

Construction accounting<\/a> adds in an additional element: project accounting. Not only that but projects can last a long time, leaving large gaps between cash coming into the business.<\/p>\n\n\n\n

How construction accounting differs from normal business accounting is in the following, which could effectively form the chapters of an accounting manual for a construction company.<\/p>\n\n\n\n

Most firms focus on the following areas when it comes to watching and presenting the numbers.<\/p>\n\n\n\n

Estimating<\/h3>\n\n\n\n

The first step towards taking control of your finances is to understand your project costing each and every time.<\/p>\n\n\n\n

You need to be able to easily and effectively detail contract amounts, estimates, costs, subcontracts, purchase orders, quantity totals, production information, customer information, billings and other project information in as much detail as you need.<\/p>\n\n\n\n

Because of the nature of construction and the fact timelines are often stretched, you’ll also need to be able to detail project totals by job, year, quarter, month or week, as well as period-to-date accumulators on a daily, weekly, two-weekly or a more irregular semi-monthly basis.<\/p>\n\n\n\n

This kind of data is the bare minimum for any construction firm that wants to stay on top of it all rather than lurch from one financial challenge to the next.<\/p>\n\n\n\n

Project management<\/h3>\n\n\n\n

The nature of construction work means even the best plans are regularly torn up or rejigged. That means being able to anticipate these changes and pivot to take control of variations or change orders is vital.<\/p>\n\n\n\n

This includes changes to the design, materials, work patterns and more. An experienced construction manager knows to anticipate and then manage what’s required.<\/p>\n\n\n\n

This starts before the first spade hits the ground.<\/p>\n\n\n\n

Your contracts should include clauses to allow for variations, and these should state clearly what the anticipated costs might be with reference to the project and job costing.<\/p>\n\n\n\n

Understanding your budget and why it’s changed is critical to pinpointing your true job costs.<\/p>\n\n\n\n

Documenting and monitoring the status of change orders will give you that vantage point and make sure you get paid for all the work you do.<\/p>\n\n\n\n

Compliance<\/h3>\n\n\n\n

Firms are increasingly being hit by legislative accounting requirements, which not only impacts construction accounting but effectively defines how it’s done.<\/p>\n\n\n\n

The UK government has introduced a raft of changes to construction accounting, including the VAT domestic reverse charge<\/a>, and new processes for submitting tax returns via Making Tax Digital.<\/p>\n\n\n\n

This is all on top of requirements for processing payments as part of the Construction Industry Scheme<\/a> (CIS), the rules for which have recently been adjusted<\/a>.<\/p>\n\n\n\n

How to prepare a final account in construction<\/h2>\n\n\n\n

Well-prepared financial statements in the final accounts contain a goldmine of timely and revealing information about your company’s financial position.<\/p>\n\n\n\n

What are its strengths?<\/p>\n\n\n\n

What are its vulnerabilities and challenges?<\/p>\n\n\n\n

Is the business making money?<\/p>\n\n\n\n

Savvy construction executives use the information on these final accounts\u2014most notably the balance sheet, income statement and statement of cash flows\u2014to drive decisions and chart a course for the company’s future.<\/p>\n\n\n\n

Measuring your true growth from year to year can help assess your policies and financial strategies.<\/p>\n\n\n\n

Here are the four most useful indicators you’ll find in a final account in construction.<\/p>\n\n\n\n

1. Debt-to-Equity Ratio for construction accounting<\/h3>\n\n\n\n

The debt-to-equity ratio is used as a standard for judging a company’s financial standing and its ability to repay its obligations.<\/p>\n\n\n\n

Banks look at the ratio and use it to assess risk in providing a loan.<\/p>\n\n\n\n

Lenders prefer low debt-to-equity ratios (less than 1.5-2:1) because their interests are better protected in the event of a business decline.<\/p>\n\n\n\n

Higher ratios indicate the company is being financed by creditors rather than from its own financial sources, which could send up a few red flags.<\/p>\n\n\n\n

2. Gross Profit Margin for construction accounting<\/h3>\n\n\n\n

Gross margins reveal how much a company earns on projects, taking into consideration the costs that it incurs for producing its products or services.<\/p>\n\n\n\n

It’s one of the most commonly used measures in the construction industry because it provides a good indication of how profitable a company is at the most fundamental level\u2014including how efficiently a company uses its resources, materials and labour.<\/p>\n\n\n\n

As a construction executive, you should analyse gross profit on jobs frequently throughout their lifecycle.<\/p>\n\n\n\n

By performing a fade analysis, comparing gross profit at the completion of a project to the estimated gross profit at inception, as well as at interim points along the way, you can detect and resolve problems on the job and determine strategies for better controlling costs.<\/p>\n\n\n\n

3. Average Age of Accounts Receivable for construction accounting<\/h3>\n\n\n\n

The only thing worse than not having work is doing the work and not getting paid for it.<\/p>\n\n\n\n

Cash is king. The age of your accounts receivable, therefore, has become an important measuring stick for executives and other reviewers of financial statements.<\/p>\n\n\n\n

If your invoices are taking longer to collect, questions will arise regarding the status of your jobs and clients.<\/p>\n\n\n\n

Review your Accounts Receivable Aging constantly and use it as a tool to detect collection problems and take action if your average age of receivables exceeds more than 10 to 15 days over terms of collection.<\/p>\n\n\n\n

4. Working Capital Ratio for construction accounting<\/h3>\n\n\n\n

When third parties review finances, the main basis for their decision-making is typically a construction firm’s working capital ratio\u2014the central indicator of the health of your business finances.<\/p>\n\n\n\n

To calculate this fundamental figure, start with current assets and divide by the current liabilities on your balance sheet for a year-end or period financial statement.<\/p>\n\n\n\n

For example, if at the end of the year your firm has \u00a31m in current assets and \u00a3500,000 in current liabilities on your year-end balance sheet, you have working capital ratio of 2-to-1.<\/p>\n\n\n\n

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Download your free guide, Taking the confusion out of construction accounting<\/a><\/div>\n<\/div>\n\n\n\n

Frequently asked questions about construction accounting<\/h2>\n\n\n\n

Although the above explains the fundamentals of construction accounting for the likes of builders, accountants and others, let’s take a quick look at some of the basic questions that get asked.<\/p>\n\n\n\n

What is construction accounting?<\/h3>\n\n\n\n

Construction accounting focuses on tracking materials and labour, and the scope of construction accounting is beyond just a fixed office or manufacturing environment.<\/p>\n\n\n\n

The needs of construction work mean different kinds of accounting processes need to be used.<\/p>\n\n\n\n

Some of this is the same kind of traditional number crunching, as seen in any business, but much of it relates to the project work undertaken by construction firms.<\/p>\n\n\n\n

For most firms, there are two elements to construction accounting: project-level accounting and business level accounting.<\/p>\n\n\n\n

At the project level, construction accounting aims to always have the financial details that provide answers to the following questions:<\/p>\n\n\n\n