Construction accounting is not just tracking accounts payable, receivable, and payroll. Unlike other businesses, construction companies have to manage other anomalies like job costing, retention, progress billings, change orders, and customer deposits. These extras make CIP or construction in progress accounting relatively more complicated than regular business accounting.

What Accounting Method Do Construction Companies Use?

To minimize discrepancies and keep records clean, construction companies usually opt for double-entry accounting, in which entries are added twice to a ledger to record a single transaction. It is the approved bookkeeping method in the construction industry, viewing the complexities involved.

As it goes, small construction companies rarely hire experts to track and record their transactions. However, as the company expands, recruits more employees, and works simultaneously on multiple projects, tracking transactions on a spreadsheet gets difficult and time-consuming.

At such times, it is better to switch to more advanced software and accounting methods like construction in progress accounting to ensure your business doesn’t lose its grip on finances.

Understanding Construction-in-Progress (CIP) Accounting

Construction-in-progress or CIP accounting is a technique accountants use to manage costs linked to fixed-asset constructions. This technique works because construction projects are way more complex than other projects. Many unique costs are involved in construction projects, and mixing them with others on the balance sheet only creates disarray.

That’s why it is better to track projects undergoing construction separately on a different balance sheet until completion. However, it is easier said than done, as managing a single balance sheet is no child’s play, and handling more than one only makes the task almost undoable.

Given this, construction companies should delegate their finances to experts, to teams like Monily with the capacity and knowledge to manage multiple balance sheets simultaneously.

Why is CIP Accounting Necessary?

Every business must prepare up-to-date and accurate reports to account for their profits and expenses. Perhaps one of the most important is the balance sheet that indicates a company’s net worth. The balance sheet also includes information about the company’s assets, even those currently not in use.

However, preparing accurate reports is not simple for construction companies whose work-in-progress assets are unique. Amid the construction progress, these assets are not usable as they require months or years for completion, complicating bookkeeping.

Companies that don’t track CIP costs accurately and separately make their records more complicated than they need to be. Mixing CIP projects with others create a hazy picture of business finances as it indicates that a company is generating expenses that are producing zero profits. Thus, to keep things simple and the balance sheet balanced, it is best to keep them separate.

Is Construction In Progress Accounting Difficult?

Managing construction-in-progress accounts is relatively more complicated than managing other business accounts. More than that, they consume double the time. Firstly, a construction company does double-entry bookkeeping, as it is the approved method of tracking finances in the industry.

And, once you add CIP accounting to it, the task becomes an ordeal. Managing CIP accounts with others or even separately requires experience and proper knowledge.

That’s why most companies often hire a CFO to manage their accounts and ensure their finances are clean and error-free.

See Also: How Can CFO Consulting Help My Business?

Why Auditors Target Construction Companies?

Due to the complexities involved, some construction companies think they can get away with storing costs in their accounts longer than they should – a ploy practiced by many in an attempt to tackle asset depreciation. However, auditors know all about these tactics and are fishing to catch a culprit in the act. So, how does it work?

Simply put, incomplete assets do not depreciate. Construction companies keep their construction-in-progress accounts open for longer than needed to keep their assets value high and misrepresent profits. However, once they get caught, they have to pay massive penalties. Thus, it is best never to store costs longer than needed, even by mistake.

That’s another reason why it is better to delegate CIP accounts to the experts who know how to help you avoid such mistakes and stay compliant.

Summary

– Construction in progress accounting is more complicated than regular business accounting.

– Construction companies must also track anomalies like job costing, retention, progress billings, change orders, and customer deposits.

– Construction-in-progress and other accounts must be separate to minimize the hassle and keep records balanced.

– Managing CIP accounts require proper knowledge, experience, and advanced bookkeeping tools.

Improperly managing CIP accounts may cause financial trouble during an audit.

Wajiha Danish

Wajiha Danish is the Director at Monily, overseeing financial strategies and operations for small and medium businesses. She has over 18 years of experience, including her role as Controller at HOCHTIEF PPP Solutions North America. Wajiha's background includes significant roles at Pakistan Petroleum Limited and A.F. Ferguson & Co. (PwC Pakistan). She is a Chartered Certified Accountant (ACCA) and Certified General Accountant (CGA) with expertise in financial management and project finance.