Cost of Goods Sold in the Construction Industry – Explained


Accounting plays a vital role in business for management and admiration of any business. Business requires to record all costs directly and indirectly for producing the products.

These costs called the cost of goods sold by an entity. The cost of goods sold is deducted from Sales Revenue to calculate the gross profit margins. Cost of Goods Sold often includes the following expenses.

  1. Direct Labor involved in the operation
  2. Direct material consumed in the production
  3. Taxes on operational sectors.

Cost of Goods Sold in the Construction Industry:

Cost of goods sold in the construction industry is quite tricky rather than other simple businesses.

Construction Industry:

In construction industry contractors or construction companies face some challenges to implement accounting principles and standards.

In this context, we will discuss those challenges and identify the regular accounting practices and implementation of those principles in the construction industry.

What is Unique in the Construction Industry?

In the Construction industry, there are always some challenges for contractors or Construction Company, whether you are preparing the accounting books or laying bricks in operations. In a typical business like a grocery store, we use typical accounting techniques to implement the accounting standards.

In the construction sector traders offer customized nature work in different locations regularly. The construction industry categorizes costs; differently, these costs include traveling costs, mobilization costs like types of equipment and Tools.

Cost of Goods Sold in the Construction Industry:

Regular businesses record the cost of sales simple cost of production, but in construction sectors, it is complex to record the cost of sales.

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Because each cost occurred directly and indirectly in many categories, it is very complicated to distinguish direct and indirect costs when you are monitoring all categories.

Some customized accounting software can help us to segregate the costing processes, which will save time. Customized Software for the construction industry is expensive than other regular businesses.

In the construction sector business often uses a percentage of completion implement accounting rules.

According to this method, businesses record expenses and Income regularly over the length of the project, nut recognize revenue on the completion percentage of the project. 

So it isn’t accessible to the calculated cost of sales without the help of accounting software.

In the construction sector, most of the components include the following items and may vary on some customized nature operations in the sector.

  1. Direct Labor Cost
  2. Direct Raw material cost.
  3. Deprecation of Machinery used directly on construction.

The cost of goods sold might be changed due to an inventory accounting system used by an entity. In construction, two different methods implemented to record work in progress.

First, the contract method and second, percentage method. There will be variation in recording cost of goods sales. According to both discussed methods inventory account will be called construction work in progress.


Cost of goods sold is material nature expense for the construction sector, it is necessary to apply acceptable accounting principles, so we have to understand first, customized accounting procedures and then implement to assess the performance of the company.

Cost of Goods Sold is the material cost of the industry to it necessary for management or contractors to understand the applicable accounting procedures.

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The best and way to implement the procedures is through the use of customized accounting software. This Software can help the management to assess the accurate cost of sales quickly.