Project accounting in construction: how it works and why it matters
Why company-wide results are not enough and you need to know what each project is earning.
In a construction company, the company-wide income statement hides what really matters: how much each project is earning. One project can be funding another’s losses without anyone noticing until it’s too late.
What changes
Project costing. Each project is a cost center. Materials, labor, subcontracts, equipment rental and overhead are assigned to the project that consumes them.
Revenue by percentage of completion. Revenue isn’t recognized all at once when the contract is signed or the work is delivered: it’s recognized as the project progresses. That way, each month’s results reflect the actual work done that month.
Tracking advances and retentions. Client advances are a liability until the work is performed. Retentions held as guarantees are a receivable that is released later. Mixing them into operating cash flow gives a false picture of liquidity.
Why it matters
With project accounting you can answer, project by project: am I making or losing money? Does the budget still hold? How much do I still have to collect? Without it, a construction company is flying blind.