Accounting, Cost Accounting, and Billing Process in Real Estate and Construction Industry

Table of Contents

1. Introduction
2. Importance of Specialized Accounting in Real Estate
3. Differences Between General Accounting and Construction Accounting
4. Cost Elements in Construction and Real Estate
5. Costing Techniques for Construction Industry
6. Billing Process in Real Estate and Construction
7. Taxation and Compliance in Construction Industry
8. Common Accounting Challenges in Real Estate and Solutions
9. Full Case Study: From Project Initiation to Final Accounting
10. Best Practices & Future Trends in Construction Accounting
11. Conclusion

1. Introduction

The real estate and construction industry operates on long-term projects, requiring unique financial management methods. Unlike traditional businesses that record transactions immediately, construction accounting follows work progress, milestone-based payments, and retention money tracking.

To ensure profitability, companies need to adopt:

• Percentage Completion Method (PCM) for revenue recognition
• Work-in-Progress (WIP) Accounting
• Cost tracking and control using specialized techniques

This article covers accounting, cost accounting, billing, taxation, challenges, and a full case study to help professionals and CMAs navigate the financial complexities of construction projects.

2. Importance of Specialized Accounting in Real Estate

Why is Construction Accounting Unique?

1. Long-Term Duration – Projects span multiple years, requiring careful revenue and cost tracking.
2. Variable Costs – Raw material and labor costs fluctuate, affecting project budgets.
3. Regulatory Compliance – Taxes, contracts, and RERA laws impact accounting.
4. Complex Billing Models – Multiple payment structures exist for customers, contractors, and banks.

Example:

A real estate company starts a ₹200 Cr commercial project in 2024, to be completed by 2027. How should they account for revenue and costs in each financial year? The Percentage Completion Method (PCM) can be used.

3. Differences Between General Accounting and Construction Accounting

Feature - General Accounting - Construction Accounting
Revenue Recognition - Based on invoice date - Based on work completion percentage
Cost Allocation - Per department - Per project/site
Billing Process - Fixed-price invoices - Milestone, retention-based billing
Expense Recognition - Immediate booking - Spread over project duration

Example: PCM vs. CCM

• PCM (Percentage Completion Method): If a project is 60% complete, 60% of revenue is recognized.
• CCM (Completed Contract Method): Revenue is recognized only when the project is completed.

4. Cost Elements in Construction and Real Estate

4.1 Key Cost Categories

1. Material Costs – Cement, steel, tiles, electrical fittings
2. Labor Costs – Masons, site engineers, construction workers
3. Equipment Costs – Machinery rentals, tools
4. Subcontractor Costs – Third-party plumbing, painting, electrical work
5. Indirect Costs – Administrative expenses, legal fees

4.2 Example: Cost Breakdown for a ₹50 Cr Housing Project

Material Costs: ₹20 Cr (40%)
Labor Costs: ₹12 Cr (24%)
Overheads: ₹8 Cr (16%)
Subcontracting Costs: ₹5 Cr (10%)
Miscellaneous: ₹5 Cr (10%)

5. Costing Techniques for Construction Industry

1. Job Order Costing – Tracks costs per specific project.
2. Activity-Based Costing (ABC) – Allocates indirect costs based on actual usage.
3. Standard Costing – Estimates costs for better budgeting.
4. Machine-Hour Rate Costing – Allocates overheads based on equipment usage.

Example:

A high-rise project in Mumbai used Activity-Based Costing (ABC) to allocate labor and subcontractor costs, preventing cost overruns.

6. Billing Process in Real Estate and Construction

6.1 Types of Billing Methods

1. Milestone Billing – Payments after each stage (e.g., foundation, structure, finishing).
2. Lump-Sum Billing – Fixed contract price agreed at the beginning.
3. Retention Billing – 10% of the contract amount is held until project completion.
4. Cost-Plus Billing – Charges based on actual expenses plus a fixed profit margin.

6.2 Example: Milestone-Based Billing for a ₹100 Cr Project

Advance Payment: 10% = ₹10 Cr
After Structural Completion: 40% = ₹40 Cr
After Interior Work: 30% = ₹30 Cr
Final Payment: 20% = ₹20 Cr

7. Taxation and Compliance in Construction Industry

• GST: 5% (residential), 12% (commercial)
• TDS: 2% deducted on contractor payments above ₹30,000
• RERA Compliance: Project registration, escrow account maintenance

Example:

ABC Builders files quarterly GST returns (GSTR-1, GSTR-3B) and claims Input Tax Credit (ITC) on material purchases to save costs.

8. Common Accounting Challenges in Real Estate and Solutions

Challenge - Solution
Revenue Recognition Delays - Use Percentage Completion Method (PCM)
Cost Overruns - Implement Activity-Based Costing (ABC) and Budgetary Control
GST Compliance - File GSTR-1, 3B timely

9. Full Case Study: From Project Initiation to Final Accounting

9.1 Project Overview

ABC Developers is constructing 50 luxury villas in Bangalore with a ₹200 Cr budget over 3 years.

9.2 Cost Allocation and Revenue Recognition

• Year 1 (30% completed) → Revenue: ₹60 Cr, Cost: ₹50 Cr
• Year 2 (50% completed) → Revenue: ₹100 Cr, Cost: ₹85 Cr
• Year 3 (100% completed) → Revenue: ₹200 Cr, Cost: ₹180 Cr

9.3 Profit Calculation

Profit = Revenue - Cost = ₹200 Cr - ₹180 Cr = ₹20 Cr

Using PCM ensures smooth financial reporting and investor confidence.

10. Best Practices & Future Trends in Construction Accounting

1. Adopt Digital Accounting Software (SAP FICO, Tally)
2. Use Cloud-Based Billing Solutions
3. Implement Cost Tracking Tools (ERP Systems)

Emerging Trend:

AI-based predictive costing helps control cost overruns and manage risks better.

11. Conclusion

Real estate and construction accounting is complex yet crucial for project profitability. Using proper costing techniques, tax compliance strategies, and billing processes ensures efficient financial management.

Key Takeaway:
Adopting modern accounting software, compliance automation, and structured cost tracking improves construction project efficiency and profitability.

Thanks, 

CMAKnowledge.in