How to Create a Chart of Accounts for Construction Companies and Contractors
- Hannah Nguyen
- Dec 19, 2021
- 10 min read
Updated: Jul 23
Keeping track of all money moving in and out of your construction business can be challenging and time-consuming, that is why you need to create a chart of accounts. It will allow you to track every transaction by category and subcategory. Each account in the chart of accounts is assigned an account number, which helps organize and categorize financial data for accurate reporting and tracking.
Put simply, a chart of accounts (COA) is the foundation of an accounting system of a construction company. A chart of accounts for construction companies provides the structure to organize financial transactions. A well-structured construction chart of accounts enables the business owner to make informed decisions and manage their construction business more effectively. It’s a key component of a company’s financial recording and reporting system.
Explore the definition of a chart of accounts for construction company—also referred to as a construction chart—and find out how to create a chart of accounts with our comprehensive guide.
Understanding the Construction Industry
The construction industry is known for its complexity and fast-paced environment, with construction companies often juggling multiple projects, subcontractors, and suppliers at once. This dynamic landscape requires a robust accounting system that can handle the industry’s unique challenges, such as tracking costs across various projects and managing payments to numerous stakeholders.
Accurate financial reporting is essential in the construction industry, not only for internal management but also to comply with industry regulations and standards like GAAP and IFRS. A well-designed chart of accounts helps construction companies maintain compliance and ensures that all financial transactions are recorded correctly. By understanding the specific needs of the construction industry, companies can develop a chart of accounts that supports efficient business operations and provides the foundation for reliable financial reporting across multiple projects.
TABLE OF CONTENT What is a chart of accounts?
What is a chart of accounts?
A contractors chart of accounts consists of all the financial accounts in your company’s general ledger. This organizational tool allows you to break down all the transactions that your company conducted during a specific accounting period into different subcategories. Each subcategory has to correspond to the structure of the construction company’s financial statements. Asset accounts and liability accounts are key components of the chart of accounts, helping to organize financial transactions related to business-owned assets and obligations, and ensuring that assets, such as cash and receivables, and liabilities are properly tracked on the balance sheet.
By separating out your expenditures, revenues, assets, and liabilities, a chart of accounts enables you to gain insight into the effectiveness of your business’s area. A well-structured chart of accounts supports accurate reporting, making it easier to monitor compliance and make informed decisions. Not only used to organize finances, but your construction company also uses it to give interested parties, such as investors and shareholders, a clearer insight into your company’s financial health.
Sample chart of accounts for construction
Here is a basic sample list of account numbers that provides the skeleton of the financial reporting system:
1000 Assets
1001 Current Assets
1701 Long-term Assets
2000 Liabilities and Equity
2001 Current Liabilities
2501 Long-term Liabilities
3000 Income and Direct Expense
4000 Indirect Expenses
5000 Financing Expenses
6000 Sales and Marketing Expenses
7000 Rental Operations Expenses
8000 General and Admin Expenses
9000 Other Income and Expenses
The accounts in the list above provide the structure for the construction company’s financial statements and are tailored to provide the information needed on those reports. Common reports for a construction company include income statements, balance sheets, and work-in-progress reports, which help track costs incurred during construction projects. Our Irvine Bookkeeping provides your construction company with our accounting and bookkeeping for contractors. Help you optimize your time.
How a chart of accounts works in construction
Construction companies use a chart of accounts to organize financial transactions in order to build financial statements. When a transaction is entered, it becomes recorded in a double-entry system. Financial statements summarize these transaction amounts for a given time period. The chart of accounts also helps categorize expenses, such as direct, indirect, and G&A costs, which improves project tracking and financial reporting.
The accounts fall into the corresponding categories based on the type of work your construction company performs and how income is recognized. For instance, material suppliers and equipment company rental companies are going to have very different charts of accounts than a contractors. Job costs, including direct costs like labor, materials, and subcontractor fees, are tracked separately to analyze project profitability and ensure accurate cost management.
COAs can vary and be tailored among construction companies, no two companies are exactly alike. Each company develops its own COA based on its requirements and operation. However, they also comply with the guidelines set out by the Financial Accounting Standards Boards (FASB) and Generally Accepted Accounting Principles (GAAP). Certain accounts track the procurement, utilization, and management of materials and equipment essential for construction projects, supporting accurate asset and inventory tracking.
Once the overall structure of the chart is established, it is kept the same from year to year. As a result, it ensures that accurate comparisons of the company’s finances can be made over time.
Why construction businesses need a chart of accounts
The chart of accounts for construction is very important for several reasons.
A well-structured chart of accounts helps manage the financial aspects of a construction business by organizing and tracking all financial transactions efficiently.
As mentioned, the most important role is to provide you with a clear picture of the financial health of your construction company.
When you record full details, do , and track every transaction, you know exactly where your construction company is marking and spending money. Everything from a new bank loan to an invoice from a supplier is recorded inappropriate categories, making it easier to find. A well-organized chart of accounts also contributes to the financial success of construction companies by supporting better financial management and decision-making.
Read More: 6 Key Construction Accounting Best Practices
How to create a chart of accounts for a construction company
Before you start building your own COA, there are some key components that will help you shape your account structure – regardless you are a supplier or contractor, you need to recognize income and track indirect expenses. It is also important to include overhead costs and operating expenses in your chart of accounts to ensure all day-to-day business costs, such as rent, wages, utilities, and administrative expenses, are properly categorized for accurate financial reporting.
Material suppliers and contractors need two different COA structures. For suppliers, the account structure is much simple than a contractor because they recognize income when they sell materials. Meanwhile, contractors have to keep track of the progress of projects. Also, contractors have more complex income streams and generally are recognizing their income based on the completion of work. Additionally, tracking labor as a separate category is essential for accurate project costing and effective financial management.
Recognizing income
There are two fundamental ways to recognize income in construction, including completed contracts or percentages of completion.
The first recognizes income when a project is totally complete and the invoice is sent at the end. On the other hand, the percentage of completion recognizes income at regular intervals as the project progresses.
Tracking indirect expense
Indirect expenses are expenses that provide support to the construction of projects but aren't specific to any one entity. They can include rent, phone bills, advertising, legal fees, labor burden, or travel expenses. Some companies consider these expenses as administrative expenses and others track them as indirect job expenses.
And now you've figured out what type of company you are (supplier and contractors) and determined how you recognize your income, and whether you want to track indirect expenses, you can organize your COA
Basic account categories
While COAs can vary from company to company, there are some basic categories that will be reflected in your financial statements, including the balance sheet and the income statement. Asset accounts and liability accounts are foundational categories in the chart of accounts, helping to organize and track business-owned assets and obligations for accurate financial reporting.
In a chart of accounts, accounts are shown as the order they appear on your financial statements. Assets, liabilities, and shareholder’s equity (balance sheet accounts) are shown first, followed by income and expenses. Under expenses or cost of goods sold, you should also include 'Other direct costs'—these capture additional direct expenses such as equipment rental or project-specific costs, ensuring a comprehensive view of your business’s financial activity.
Assets
Asset accounts belong to the first category on your chart of accounts.
Each item below represents a specific asset account used to categorize and track your company's resources.
Bank accounts: checking and savings accounts (asset accounts for cash management)
Accounts receivable: amounts owing to you for work performed (an asset account)
Retention receivable: amounts owners are holding until work is completed (asset account)
Equipment/land/buildings: any other asset accounts your company owns that help you do your work
Underbillings: when you bill less than you’ve completed (percent complete income recognition, tracked in a specialized asset account)
Inventory: material suppliers’ inventory on hand, developers land, and work in progress (these asset accounts track the movement and usage of inventory and equipment essential for project execution)
Certain accounts track the procurement, utilization, and management of materials and equipment, ensuring accurate monitoring of assets, inventory, and resources required for construction or service projects.
Income
Sales: income from project or material sales
Interest income: income earned from interest on bank accounts or other investments
Over/under billings adjustment: necessary adjustments to make income match percent complete
Expenses
Direct expenses: costs directly attributable to specific projects, such as labor and materials
Subcontractor costs: payments made to third-party contractors for specialized work on projects
Equipment rental: expenses for renting construction equipment used on job sites
Administrative costs: admin labor, software
Office expenses and rent: building rent, office supplies, postage, shipping
Taxes: business income taxes and sales tax
Insurance: general liability, automotive, workers comp, and umbrella coveragess
Indirect expenses
Vehicle expense: costs for fuel and maintenance for vehicles driven by field personnel
Phones: costs for equipment and service contracts for field personnel
Liabilities
Each item below is a type of liability account commonly used in construction accounting:
Customer deposits: customer down payments and interim payments when using the completed contract method
Accounts payable: amounts owing to vendors for materials, equipment, subcontractors
Retention payable: amounts owing to vendors held until work is completed. Retention accounts are essential for tracking amounts withheld from payments to vendors or subcontractors until the project is satisfactorily completed, improving transparency and accurate financial reporting.
Loans: company or project loans outstanding
Overbillings: when you bill more than you’ve completed (percent complete income recognition). Construction WIP accounts may also function as a liability account when amounts billed to clients exceed incurred costs, reflecting this liability on the balance sheet.
Retained earnings: company profits or losses from the previous fiscal year
Cost of Goods Sold
Job costs in construction projects include direct costs such as labor, materials, equipment, and other direct costs. Properly separating and managing job costs within your Chart of Accounts (COA) helps measure project profitability, ensures accurate financial reporting, and supports informed decision-making.
Labor costs: includes wages, benefits, employer taxes; tracking labor is essential for accurate project costing and financial analysis
Material costs: raw materials for the finished product
Subcontractors: trade contractors and others
Equipment: cost of rental or owned equipment
Other direct costs: includes permits, equipment rental, travel expenses, and other project-specific expenses
Now that you have learned the fundamental parts of a chart of accounts, You can begin to build your own COA by the chart of accounts for construction company excel that grows with business with your construction business and helps you succeed. Remember when you’re building a chart of accounts, consistency is key. Try to avoid frequently changing your contractor’s chart of accounts so that you can more easily compare results. Whenever you have a doubt, consult with your professional account to avoid confusion.
Read More: Best Practices for Construction Accounting Read More: Job Costing Essentials for Contractors
Construction Projects and Accounting
Each construction project brings its own set of financial challenges, from managing labor costs and materials purchased to tracking equipment rentals and subcontractor payments. Construction companies must accurately record all financial transactions associated with each project to ensure effective project management and financial reporting.
A well-structured chart of accounts allows construction companies to assign costs and revenues to specific projects, making it easier to track expenses, monitor project budgets, and analyze financial data. This level of detail is crucial for managing multiple projects simultaneously and for generating detailed financial reports that reflect the true financial performance of each project. By organizing financial accounts by project, companies can improve cost control, enhance project management, and ensure that all financial data is up to date and accurate.
Best Practices for Construction Accounting
To achieve accurate financial reporting and maintain financial stability, construction companies should follow several best practices in construction accounting:
Maintain a well-organized chart of accounts: Ensure that all the accounts are clearly defined and structured to reflect the company’s operations and reporting needs.
Use specialized accounting software: Invest in construction management software or popular accounting software designed for the construction industry to streamline financial management and reporting.
Implement job costing and cost codes: Track expenses and revenues by job and use cost codes to categorize costs, making it easier to analyze project profitability and control costs.
Adopt accrual accounting: Record financial transactions when they occur, not just when cash changes hands, for more accurate financial statements and informed decisions.
Regularly review and update the chart of accounts: Keep the chart of accounts up to date to reflect changes in business operations, new projects, or regulatory requirements.
Prepare detailed financial reports: Generate detailed financial reports, such as income statements and balance sheets, to monitor business performance and support strategic planning.
By following these best practices, construction companies can ensure accurate financial reporting, improve financial performance, and make informed decisions that drive business success and future growth.
Developing your contractors chart of accounts can be tricky and time-consuming. Everything from defining an appropriate framework, the complex requirements of the construction industry, revising your chart of accounts for construction company excel regularly can distract you from your main tasks to grow your business and produce revenue.
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