In the construction industry, revenue recognition can be a complex subject, particularly for those specializing in remodeling projects. Accurately recognizing revenue is crucial for maintaining a healthy financial picture and ensuring compliance with accounting standards. This blog post will provide guidance on how remodelers should recognize revenue and the best practices to follow.
Understand the Percentage of Completion Method
One of the most common methods for recognizing revenue in the construction industry is the percentage of completion method. This approach involves recognizing revenue based on the proportion of work completed during a specific accounting period. To apply this method, you’ll need to estimate the total project costs and the percentage of work completed at the end of each accounting period.
To calculate the percentage of completion, divide the costs incurred during the accounting period by the total estimated project costs. Then, multiply this percentage by the total contract price to determine the amount of revenue to recognize.
Implement a Project Management System
A robust project management system can help you track costs, progress, and other essential project data. This information is crucial for accurately recognizing revenue using the percentage of completion method. Implement a system that allows you to monitor project progress, update cost estimates, and maintain clear communication with your team.
Account for Change Orders
Change orders are a common occurrence in remodeling projects, and they can significantly impact your project’s costs and revenue. To accurately recognize revenue, you must account for change orders in your cost estimates and update your percentage of completion calculations accordingly. Establish a clear process for handling change orders, including documentation, approval, and communication with the client.
Stay Compliant with Accounting Standards
In the United States, the Financial Accounting Standards Board (FASB) has established guidelines for revenue recognition in the construction industry. The Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, outlines the principles and procedures that construction companies must follow. Be sure to familiarize yourself with these standards and ensure that your revenue recognition practices comply with the regulations.
Monitor Progress Billing
Progress billing is an essential aspect of revenue recognition for remodelers, as it allows you to invoice clients based on the percentage of work completed. Ensure that your progress billing aligns with your revenue recognition practices to maintain a healthy cash flow and accurate financial records.
Review Your Contracts
Your contracts play a crucial role in determining how to recognize revenue for your remodeling projects. Ensure that your contracts clearly outline the scope of work, payment terms, and any contingencies related to change orders or project completion. Regularly review your contracts to ensure that they are up-to-date and comply with industry standards and regulations.
Consult with a Professional
If you’re uncertain about your revenue recognition practices or need guidance on navigating the complexities of construction accounting, consider consulting with a professional bookkeeper or accountant. These experts can provide valuable advice, identify potential issues, and help you implement best practices for revenue recognition.
In conclusion, accurately recognizing revenue is a critical aspect of managing a successful remodeling business. By understanding the percentage of completion method, implementing a project management system, and following industry best practices, you can ensure that your revenue recognition practices align with your financial goals and regulatory requirements. Remember that a solid understanding of revenue recognition will contribute to your remodeling business’s overall financial health and success.
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