How project-based accounting works in the construction industry

Every construction project is its own financial ecosystem, so contractors need to evaluate each job’s profit and loss separately. Project-based accounting gives contractors the structure to understand actual versus budgeted costs by project. 

But putting this framework into practice can be challenging. Each project comes with its own labor, equipment, and materials costs to manage. Strong project-based accounting practices help teams keep these moving parts organized and provide clear visibility into costs, cash flow, and overall profitability by job, ultimately helping them bid more competitively and prioritize the work that drives the strongest margins. 

Read on for a breakdown of project accounting and practical ways to manage it effectively.

What is project accounting, and how does it work?

Project accounting is the practice of managing revenue and costs at an individual job level, tying transactions to specific cost and job codes. It lets construction teams track expenses and revenue against project budgets and understand the financial performance of each job in detail.

This gives companies a precise view of all the financial components of a project, from labor and subcontractors to equipment and materials. With this information, businesses can identify the most profitable jobs and improve estimate accuracy, helping them bid more competitively and grow profits.

Here’s an example of what project accounting looks like in practice:

• Setup and budgeting: Create the job and produce an estimate, detailed budget, and cost codes.
• Cost capture and allocation: Record direct and indirect costs, and assign them to the corresponding job cost codes. This includes labor, materials, and equipment.
• Progress tracking: Track costs, schedules, and project progression alongside the initial budget to identify gaps and overruns.
• Revenue recognition: Record revenue based on percentage of completion, and input project earnings into the financial statements.
• Performance analysis: Review costs and revenue to assess profitability, and update financial forecasts.
• Cash flow management: Record and monitor billing, subcontractor payments, and collections to see where cash is tied up and where it’s going.
• Job costing analytics and reporting: Produce detailed progress reports, and perform cost analyses to inform financial decisions.
• Project closeout: Finish billing, complete final costs, and reconcile accounts.

Common project-based accounting methods

While all project accounting methods deliver job-specific visibility, they diverge when it comes to how and when companies recognize revenue and finalize transactions. Here are the most common techniques: 

• Accrual accounting: Businesses record costs and revenue when the transaction takes place instead of when they receive or distribute the money. This is a standard accounting practice, so it’s not specific to the construction industry.
• Completed contract: Businesses recognize costs and revenue only after a project has reached 100% completion.
• Percentage of completion: Organizations record costs and revenue based on the percentage of project completion, such as when they reach certain milestones or complete specific phases of the project. This is the most common method for contractors.
• Installment: Contractors recognize costs and revenue only when they receive client payments via an installment structure.

Most companies benefit from sticking to one consistent method across projects, but the best approach depends on individual accounting policies and contract terms.

Key elements of project cost accounting

Here are a few components that support construction job accounting.

Project structure and work breakdown structure

Contractors need to break down projects into smaller components to organize work and budgets in detail. Most companies use a project management system called a work breakdown structure (WBS) for this. A WBS divides a project into phases, tasks, and cost-coded activities so teams can:

• Track expenses and allocate them to the right activities and project phases. 
• Organize timelines, tasks, and responsibilities within particular parts of a job.
• Adjust estimates as needed and reallocate resources in the event of overruns and financial bottlenecks. 

Job costing

Job costing is the process of tracking costs by job and activity (cost code) within that job. This includes the more obvious job-specific expenses, like materials and equipment, alongside indirect costs like benefits and taxes. Organizing costs this way shows contractors exactly how much they’re spending on each category, like lumber or concrete. 

Construction job costing is notoriously complicated for several reasons. Workers move between jobs, cost codes, and classifications in the same week. Add overtime, union rates, prevailing wage, and fringes, and labor costs get complicated fast. While some teams manually match paper time card hours and receipts to cost codes, others use platforms like Miter to speed up the process. 

Miter Job Costing automatically assigns costs to the correct codes, ensuring accuracy and eliminating manual work enabling real time visibility into fully burdened labor costs.

Project budgets

Creating and tracking budgets per project helps leaders predict and monitor financial obligations. Teams should routinely compare actual cost reports against the budget to understand estimate accuracy and make decisions related to material procurement, project scope, and change orders. This element gets easier over time, as thorough project-based accounting gives businesses historical data to base future budgets on.

Time and expense tracking

For accurate project-based accounting, companies need to track employee hours and assign them to the right job, cost code, and classification. Traditionally, field crews log this themselves through timesheets. But a paper or poorly integrated process is error-prone, which means office teams may lack accurate project data.

It’s best to collect these details with time-tracking software that integrates with payroll and syncs data to your accounting platform, like Miter. Employees log time from the field, and office teams receive the data in real time. Miter manages pay rates and calculates the overall labor burden for each job and cost code alongside materials, equipment, and subcontractor costs. 

Reporting frequency and KPIs

Routine work reports that measure key performance indicators (KPIs) help companies record project progress and profitability. Working with real, up-to-date numbers eliminates guesswork and gives them a better view of long-term growth. Determine the company’s top metrics and ideal reporting cadence, such as daily, weekly, and monthly. This lets leaders monitor jobs in progress and make informed future decisions.

How to set up project-based accounting

Contractors need a strategic framework to ensure project-based accounting is accurate. Project accounting software helps them maintain a consistent, efficient process by automating tasks and connecting data from various sources. Here’s how to set it up.

1. Set a project structure.

Create a standardized WBS by defining cost codes, labor hour categories, and revenue tracking methods. A consistent structure ensures each job speaks the same “financial language,” enabling cleaner reporting and allowing businesses to sync data between platforms.

2. Integrate project costs with ERP.

Sync time tracking, payroll, and expenses with an ERP. Integrated construction accounting software lets financial data flow directly to and from the payroll system, tracking and logging project costs without the effort. Platforms like Miter connect these systems together and pull data from WBSs, including jobs, locations, and accounts while pushing in fully-burdened labor and other costs. This unlocks real-time job costing. 

3. Create a budgeting system.

Build a project budget for expenses like labor, materials, and subcontractors. To find the right number, most contractors use a bottom-up approach, which involves breaking each job down into tasks and assigning costs to each action. It’s best to add some contingency money to the budget to account for delays and scope creep.

4. Implement expense management.

Create an expense management structure that categorizes, records, and approves costs. This structure usually includes specific expense policies and automatic software. For example, a company might use construction expense management software to automatically process employee reimbursements. This system would apply the items to cost codes and associate them with jobs, send them through approval, and route money to the correct accounts.

5. Create financial reports.

Choose a reporting framework, including cadence and key metrics. Contractors will also need to establish which reports to generate. For example, many contractors require WIP reports to monitor costs incurred, revenue earned, and percentage of completion. Configure software to pull the right data and generate reports on a set schedule.

6. Monitor and analyze projects with KPIs.

Track metrics mid-project to make adjustments, like quick budget and timeline updates. After each project, review KPIs to gain insights into project profitability. Popular metrics include cost variance and net profit margin, as they tell contractors the job’s total profit and its similarity to the forecasted budget. 

Simplify project-based accounting with Miter.

Project-based accounting lets companies understand how each job fits into their total financial picture. But relying on spreadsheets and paperwork leaves finance teams with disorganized, unconnected information. A reliable project cost accounting system frees teams, letting them focus on financial analysis and decision making rather than repetitive manual tasks. 

Miter is a contractor-first solution that simplifies job costing for companies running multiple projects. The platform connects time tracking, payroll, and job costing for effortless, accurate project analysis. Plus, Miter integrates with platforms that support project accounting, including QuickBooks, Sage, Acumatica, and NetSuite.