Last edited 16 Oct 2020

Accounting

Accounting is the process of identifying, measuring and communicating information to allow informed decisions to be made.

There are two major areas of accounting – management accounting and financial accounting:

Management accounting provides internal managers with the necessary information for the operation of the organisation or project. Reports tend to be designed with a particular process or decision in mind, and are produced as frequently as required by the managers.

Financial accounting is intended for external consumption. It provides users such as shareholders or regulators with information and are produced in a format that complies with the standard requirements. Reports tend to be general-purpose and provide a broad overview of the position and performance of the organisation or project. They are often produced on an annual basis.

In the construction industry, accounting may be undertaken in relation to a specific project, or in relation to a particular organisation.

On construction projects, relevant information in the form of accounts can be used as a tool to help devise strategies, to plan and to control projects. The commercial team, made up of project planners and quantity surveyors, are primarily responsible for accounting on construction projects and will typically report to the project manager.

Project accounting is vitally important as a great number of contracts and subcontracts may be active on a project, and these need to be controlled, directed, reported and kept within budget. The accounting process involves monitoring progress on all stages and issuing and paying invoices as required.

Accounting is also an important process, as in all industries, for the business planning and control of construction organisations. This will, amongst other things, report the overall budget cost of individual projects that the company is engaged with, as well as their likelihood of completing to budget or not.

For accounting to meet the needs of its users effectively, the financial information should be:

Relevant in terms of forecasting future scenarios or confirming past ones.
Reliable and free from errors or bias.
Comparable so that trends can be monitored, and potential problem areas identified.
Understandable and expressed as clearly as possible.
Available in time to inform decision making.
Of sufficient benefit to justify the cost.

Open-book accounting is a method of procuring work under which contractors are reimbursed on the basis of transparent records of the costs they have incurred. It is generally associated with incentivised target-cost contracts, management contracts and framework contracts, but can also be applied to the first stage of a two-stage, fixed-price contract.

Transparency can apply to the main contractor (whose direct costs may only amount to 20% of the total construction cost) who procures tendered, fixed-priced sub-contracts that are not open book and/or down the whole supply chain for every party involved in a project.

For more information, see Open-book accounting