They can add up fast, leading to long-term financial struggles and business viability. For this example, we are using the same numbers as we did for the cash example above. The work performed during that month was worth $250,000, all labor and rentals included.

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. For most contractors, retainage is simple enough on paper, even though by nature it’s an exception to the rule. In practice, when a contractor earns revenue under an accrual method like CCM or PCM, they have the right to issue an invoice and record the amount as an account receivable (A/R) until it’s collected.

Use Construction Software to Simplify Your Accounting Processes

Although the PCM is typically used for contractors not considered an SBT, even an SBT may need to calculate revenue under the PCM for alternative minimum tax purposes. Doing so determines whether the taxes you paid for each year of your contract were higher or lower than they would have been if you’d construction bookkeeping used actual figures to calculate your taxes instead of estimates. Instead, you pay interest on the difference in tax if you underpaid, and the IRS refunds interest to you if you overpaid. Automating inventory management is the key to increased efficiency and eliminating time-consuming manual tasks.

The main advantage of EPCM is that income is reported over the life of the contract and any losses will be recognized based on the percentage of the contract completed, called the completion factor. The completion factor is the amount of work that has been completed compared to the estimated amount remaining. The completion factor must be certified by an engineer or an architect, or supported by appropriate documentation. The contract price must include cost reimbursements, all agreed changes to the contract, and any retainages receivable.

Key Construction Accounting Best Practices for Contractors

When taxpayers use the completed contract method, the tax burden of a project generally falls into only one tax year. Meanwhile, the contractor continues to record payroll costs every time they issue checks. Up to this point, under the cash method, they don’t have any income from the work they did.