Accounting for a Construction Company: Projects, Contracts, Materials

Key rules

• under IFRS, revenue under a construction contract is recognised as the performance obligation is satisfied — at a point in time or over time (IFRS 15);
• adjustment of the VAT base when the terms, price or volume of work change (Art. 257 of the Tax Code);
• construction not completed within the standard period is subject to property tax at 3% (Art. 415).

Key competencies

Allocating costs to projects, working with construction contracts and completion certificates, accounting for materials and settlements with subcontractors.

Plus an understanding of how contract terms affect the timing of revenue recognition.

• cost accounting by project
• completion certificates and cost estimates
• settlements with subcontractors
• movement and write-off of materials
• accounting for machinery and equipment

What is checked first

Whether subcontractors' work was actually performed, whether the volumes in completion certificates are justified, and whether materials were written off correctly.

These are the standard focus points in an external review of a contractor.

Organising the work

Documents from the sites must reach the accounting department regularly, not at the end of the period. Otherwise cost allocation turns into a reconstruction of events.

A procedure for handing over documents matters more here than any accounting software.

Accounting by project

The main distinguishing feature of a construction company is the need to see the result of each project separately. A common cost pool hides loss-making projects behind profitable ones.

That is why costs are tied to a project immediately rather than allocated after the fact. Restoring this link later is almost impossible.

• direct project costs
• subcontracting costs
• materials transferred to the site
• machinery costs and operation
• overheads and how they are allocated

Working with contracts

In construction, the accountant has to read contracts before work starts: the terms for handing over completed volumes determine when the result is recognised and how settlements are made.

Particular attention goes to appendices and supplementary agreements: this is where deadlines and volumes most often change, and these changes reach the accounts late.

Materials and customer-supplied materials

The customer's materials require separate accounting and must not be mixed with the company's own inventory. Mixing them is a frequent cause of shortages that cannot be explained.

A designated responsible person on site helps: transferring materials against documents rather than by verbal agreement removes most later disputes.

Work in progress

Costs on projects where the work has not yet been handed over accumulate and affect the financial statements. Errors in valuing them distort the period's result more than any minor discrepancies.

The valuation should be supported by data on actual progress rather than calculated from the planned estimate.

What is required of the specialist

Besides command of the accounting areas, the specialist needs to understand the construction process and be able to communicate with site staff: a large part of the data does not come from the accounting department.

Practice shows that a specialist without industry experience spends the first months building these connections, and this is worth bearing in mind when hiring.

How the work is organised in a company and for an individual entrepreneur

In a company, accounting areas are usually split among several employees, and the accountant needs to set up data exchange with the production department. For an individual entrepreneur (IE) working as a contractor, the scope is narrower, but all responsibility rests with one person.

The common requirement is the same: documents on completed volumes must appear on time, otherwise accounting turns into reconstructing events from memory.

How Leader Audit helps

We provide outsourced accounting for construction companies and review their financial statements in audits.

Leader Audit is an audit firm with 13 years of practice, more than 220 engagements, and assistance with VAT refunds totalling more than UZS 200 billion.