Construction Accounting is Job Cost Accounting
Construction accounting has some unique characteristics that make it an essential tool for contractors. Construction accounting is totally different from the accounting processes needed by a retail store, a manufacturer or anyone else. Technically, construction accounting is called "Job Cost Accounting." If a contractor is not using job cost accounting, they are not using "The Right Tool for the Job." No contractor would use a rock to pound nails, just as no accountant would use generic accounting software to do job cost accounting.
What that job cost accounting means is that when we do accounting for construction we account for the costs of the jobs. Just tallying costs is not enough. Totals have to be compared to something else to be useful. It’s great to know where we are, but it’s better to know where we’re supposed to be compared to where we are.
Let’s get back to basics. Before any contractor undertakes a job, someone figures out what it’s going to cost, so he knows how much to charge to make a profit. The visionary people who figure out these costs are called "Estimators." Without a good estimator, no construction company can succeed. It’s a fact of life.
So, what good is an estimate to the accountant? The accountant knows how much was spent on that concrete floor, but doesn’t know how much it was supposed to cost. The accountant has to use the estimate as the "Budget" for the job. This set of numbers can be amended by Change Orders. As actual costs are accrued, they are compared to budget amounts to keep track of whether the job is profitable and, if not, where and why. This is the secret to successful job costing. Accounts say there is a word for contractors that do not use job cost accounting. That word is "Bankrupt!"