Construction company accountingWant to own a construction company? In order for such a business to be successful, there are a number of factors which must be taken into account. Тhe basis of which is a business plan and an accountant or accounting firm familiar with this type of business. Construction company accounting – this is a broad topic with a huge variety of specifics. In our short article we will cover only some of them.

Types of contracts important for the accounting of a construction company

There are established International Accounting Standard (IAS) 11 Construction Contracts and National Accounting Standard (NAS) 11 – Construction Contracts. This standards describe the different types of contracts from an accounting point of view. It`s important that you or your accountant is well acquainted with them when keeping the accounts of a construction company.

Construction Contracts  According to IAS 11:
  • Construction contract – a contract in which the construction of an asset or a set of assets which are closely interconnected or interdependence in terms of their design, technology and function or their end purpose or purpose is specifically agreed
  • Fixed price contract – a construction contract in which the contractor agrees to a fixed contract price or a fixed unit price of a finished product, which in some cases is bound by cost-raising clauses.
  • Cost-plus contract – a works contract in which the contractor is reimbursed for the eligible or otherwise determined costs plus a percentage of those costs or fixed remuneration.
Construction contracts According to NAS 11:
  • Construction contract – a contract for the creation (construction) of an asset or a set of assets that represent one object. The activities related to such contracts are: construction of buildings, roads, bridges, dams, tunnels, ships and other complex equipment and facilities. Also destruction or recovery of assets and recultivation of the environment after the destruction of assets, etc.
  • Contract on the basis of a “fixed price” – a construction contract in which the contractor  agrees to a fixed contract price or a fixed unit price of the finished construction product. A fixed-price contract may contain a clause for its renegotiation in cases where an increase in costs is expected.
  • Contract on the basis of “cost plus” – a construction contract in which the contractor is reimbursed the eligible or otherwise determined costs plus a percentage on those costs or solid remuneration.
  • Share of completed construction – a method of recognition of revenue and expenses by referring them to the stage of completion of the contract.

Income and expenses in accounting of a construction company

Once we have clarified to what type of contract the given transaction belongs to, the next important point comes. How to take into account the contracts, how to allocate the revenue and expenses of a particular contract, and in general in which period the accounting takes place? In the case of accounting of a construction company, most often a contract falls into different accounting – reporting periods. This is because more than a year passes between the date on which the contract is concluded and the date of completion of the activity.

In international practice, a fixed-price contract and a cost-plus contract are most often used.

In the case of a fixed price contract. The following conditions must be met simultaneously in order for the outcome of the contract to be reliably determined.
  • Total contract revenue can be reliably estimated;
  • The enterprise is likely to receive the economic benefits associated with the contract;
  • The costs of the contract for its implementation and the stage of completion can be reliably estimated at the end of the reporting period;
  • The costs relating to the contract can be clearly defined and reliably assessed. The reason for that is so the actual costs incurred under the contract can be compared with previous estimates.
In the case of a contract concluded on a cost-plus basis. The following conditions must be fulfilled simultaneously in order for the outcome of the contract to be reliably determined.
  • The enterprise is likely to receive the economic benefits associated with the contract;
  • Costs relating to the contract, whether explicitly refundable or not, can be clearly defined and reliably assessed.

The stage of completion of a contract can be determined in many ways. From this point of view, when accounting for a construction company, there is a certain amount of freedom.

According to National and International Standards. In cases where the results of a contract cannot be reliably estimated, revenue should be recognized only to the extent of the contract costs incurred also where the total amount of contract costs is likely to exceed the total amount of contract revenue, the expected losses must be recognized as an expense.

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