When and how to record revenue is the primary obstacle construction companies face when creating reports that accurately reflect the company's performance. Unlike many other industries, construction projects tend to be lengthy, complex, and vast, with a range of phases that may require partial or full payments.
Correct revenue accounting is essential for construction companies to guarantee appropriate financial reporting, compliance with financial reporting standards, and the provision of accurate information to stakeholders regarding the financial status of the company. However, many businesses are finding it difficult to keep up with the ever-changing requirements for construction accounting.
The Revenue Recognition Challenge in Construction Accounting
To contractors, construction revenue recognition means more than just identifying when the money is received. Due to the long duration of projects, revenue recognition will depend on the objectives or phases of the projects and expenses charged against the percentage completion of every project. This process becomes even more complicated due to the requirement of accounting standards such as ASC 606 that act as guidelines in identifying the revenue from contracts with customers across industries.
According to ASC 606, construction companies are required to recognize revenue by understanding contracts and identifying the revenue-generating functions, measuring and allocating revenue to each function based on the extent of progress. The standard is meant to provide greater consistency and transparency, but for construction accounting professionals, implementing ASC 606 can be a significant undertaking.
Solutions for Accurate Revenue Recognition
Construction companies need to develop a clear, consistent strategy for project-based revenue in order to overcome the revenue recognition challenge. Here’s what you can do as a construction business owner to ensure compliance with ASC 606 and streamline the revenue recognition process:
1. Define Revenue Recognition Criteria
Work with a construction accounting firm to set clear guidelines based on ASC 606. This includes the definition of the nature of the goods and services in each contract and recognition criteria that would apply to the company. By specifying the aforementioned criteria, further discrepancies may be prevented and records kept uniformly by the companies in question.
2. Use Milestone and Percentage-of-Completion Methods
Construction cost accounting often involves recognizing revenue based on project milestones or completion percentages. Careful documentation of account costs and project progress in a well-defined chart of accounts for the construction firm can make it easier to provide a summary of the project status and the amounts earned.
3. Implement Regular Audits and Reviews
To stay compliant with ASC 606 and other construction accounting standards, periodic reviews of revenue recognition practices are essential. An experienced construction accounting firm can conduct these reviews to ensure ongoing compliance and adapt processes as accounting standards evolve.
4. Invest in robust accounting systems
Accounting for construction companies requires specialized systems that can handle complex project data, from costs incurred to progress on specific tasks. Partnering with an accounting firm with advanced software designed for construction accounting can streamline data tracking and facilitate accurate revenue recognition.
By leveraging these solutions, construction companies can ensure that revenue recognition (a critical issue for them) is as easy as ABC. A reliable way to gain the confidence and trust of customers, investors, and regulatory agencies is through revenue reporting. It is not just about fulfilling compliance requirements.
In conclusion, accurate revenue recognition is a cornerstone of successful accounting for construction companies. Navigating these standards requires expertise in construction accounting, and that’s where 406 Consulting comes in. We specialize in the setting up chart of accounts for a construction company, construction cost accounting, and revenue recognition compliance. If you need assistance with accounting for construction companies, contact 406 Consulting—your trusted partner in construction accounting.
