All businesses require accounting systems tailored to their industries and other attributes, and the construction industry is no exception. Financial management for construction companies requires extra steps in compliance, accounting standards, tax laws, and more. Here are our expert accounting tips for the Illinois construction industry and how your firm can confidently stay compliant.

The Basics of Construction Accounting

Unique Aspects of Construction Bookkeeping

Construction industry bookkeeping is unique due to its project-based nature. Projects are often decentralized and involve extended payment schedules. This distinctiveness requires specialized accounting methods to accurately track and manage financials.

Management Accounting in Construction

From a management accounting perspective, project-based costing is the preferred method due to the unique needs of each project. Job costing is also commonly used. Unlike other industries, process costing is not applicable because each construction project has distinct requirements and regulations, such as prevailing wages for government projects.

Direct and Indirect Costs

Direct costs in construction accounting include construction worker wages, management salaries, and materials allocated directly to the project. Indirect costs, such as general management and administrative overhead, also apply to each construction project. Understanding the distinction between these costs is crucial for accurate project costing and financial management.

 

Effective Financial Management Practices for Construction Companies

Construction projects are often lengthy and expensive, necessitating robust recordkeeping systems tailored to the construction industry. These systems are essential for compliance and ensuring positive cash flows. Revenue alone does not indicate a firm’s success; it should also have enough cash on hand to pay bills and issue paychecks without needing to take out loans or other measures that can have long-term costs.

Cash flow forecasts and analysis can help prevent the company from running out of cash during times of major cash outlays. This analysis can predict patterns throughout the year when cash tends to be constricted or plentiful, allowing management to plan accordingly. Strategies that may work well in other industries, such as paying bills early, can be detrimental in construction because they could constrict cash flows too much.

The timing of payables and receivables is crucial to maintaining cash on hand for obligations with tight deadlines. Taxes, litigation, and joint ventures can also be major liabilities in the construction industry.

Tax strategy is separate from accounting needs. Tax planning engagements should be made at the end of the year and whenever operations materially change so that the company can properly plan for additional payments or compliance measures for tax credits. Construction contracts should have clearly defined dispute processes and remedies to prevent future disruptions and cash flow issues.

Tax Tips for Illinois Construction Companies

All businesses have tax obligations, including payroll taxes and income taxes. Construction companies need to pay into federal and state unemployment funds and may be subject to higher contribution rates in some states and municipalities.

Tax planning is important for staying compliant and finding new ways to reduce your tax obligations. Deductions reduce a firm’s taxable income, and credits provide a dollar-for-dollar reduction of the taxes owed. While there are no federal tax credits specifically for the construction industry, residential construction contractors may be eligible for federal tax credits for energy-efficient buildings built in 2023 or later. There are also additional tax credits available to all industries, such as the Work Opportunity Credit for hiring certain workers.

In addition to federal tax obligations and credits, there are many state-level tax incentives for the construction industry in Illinois. The Blue Collar Jobs Act (BCJA) is a wage-based tax credit program with several sub-categories of eligible projects. Other state-level tax incentive programs, such as the High Impact Business Program, may be available to construction outfits that invest at least $12 million and create at least 500 full-time jobs in Illinois.

Accurate recordkeeping of payments, wages, and the nature and location of construction projects is critical to ensuring that your Illinois construction company is eligible for these valuable incentives. Even if your firm is ineligible, having a solid recordkeeping system ensures that your tax filing obligations can be met in a timely manner.

Utilizing Technology and Software

A vast majority of construction businesses no longer use manual recordkeeping systems or spreadsheets to track revenue, expenses, billing, and projects. Accounting software is a must for firms to have accurate records that can be easily updated in real-time. Construction-specific accounting software can also provide a 360-degree view of projects with historical costing and predictive analytics to better manage cash flows.

Construction-specific systems now offer improved business intelligence and recordkeeping features that go beyond the one-size-fits-all framework of older, general-purpose accounting software packages. They can turn a basic recordkeeping system into a robust financial management tool that efficiently keeps projects on track and in compliance.

Compliance and Risk Management

Illinois has several regulations that all businesses must comply with, in addition to regulations specific to the construction industry. All construction projects must have a risk management strategy to address these risks, including insurance requirements and wage and hour limitations.

It is crucial to examine these regulations before commencing a project. Address these needs beforehand, such as hiring more workers where necessary and ensuring you have the correct amount of insurance.

Regular audits of accounting records, wage payments, insurance, and other compliance areas help ensure that projects avoid costly disruptions and penalties.

Streamline Your Accounting with Accounting Freedom

Streamline your construction business’s accounting processes with expert help from Accounting Freedom. Contact us today for a consultation and see how our tailored accounting services can benefit your company.