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Home Construction Contracts

Your choice of methods of accounting for income and expenses for home construction projects depends on land ownership and whether you are a small or large contractor. Your accounting method controls which costs are allocated to your projects.

Types of Home Construction

Small
Contractors

Large
Contractors

Spec Home/Land Developers

Spec Home Rules

Spec Home Rules

Custom Home on Builder's Land

CCM or Old PCM

Spec Home Rules

Custom Home on Buyer's Land

Accrual, OLD PCM, or CCM

Accrual, PCM, or CCM

Each of the available methods includes specific costs in the list of indirect job costs that must be allocated among the home construction projects benefited. Use the table below to identify which indirect job costs to allocate based on your choice of accounting method.

Indirect Costs to be Allocated to Specific Contracts

Spec Home Rules,
PCM, and
Land Developers

CCM &
Old PCM

Repair and maintenance of equipment and facilities

X

X

Utilities

X

X

Rent of equipment and facilities

X

X

Indirect labor contract supervisory wages

X

X

Indirect materials and supplies

X

X

Tools and equipment not capitalized

X

X

Quality control and inspection

X

X

Taxes on labor, materials, supplies, equipment or facilities

X

X

Depreciation

X

X

Insurance on equipment and machinery

X

X

Administrative costs that benefit the project

X

X

Production period interest expense

X

X

Officer's compensation (corporation)

X

 
Contributions to stock bonus, pension/profit-sharing, deferred compensation and other employee benefit expenses

X

 
Research and experimental

X

 
Rework labor, scrap, and spoilage

X

 
Successful bidding expenses

X

 

Homes Built for Speculation (Spec Home Rules)

When you build a spec home you are creating an asset that will be sold to another person. Spec homes are built in anticipation of a sale; therefore, a construction contract does not exist. You do not use the rules for home construction contracts, which are contracts to build a home with four or fewer residential units.

When you build a spec home, all the direct and indirect costs are accumulated. These costs are called the basis of the property and cannot be deducted until the home is sold. The costs that must be included in the basis of the home are:

  • Land
  • Materials
  • Labor, and
  • Allocated indirect costs (See table of indirect costs)

Thus, the income is reported and the basis deducted in the year the home is sold.

Custom Homes Built on the Builder's Land

A custom home built on land owned by the contractor is a construction contract because the home must be built to fulfill the contract with the buyer. As with spec homes, you accumulate the costs of the home and postpone the deduction of the basis until the contract is completed.

If you are a large contractor, you must use the Spec Home Rules. If you are a small contractor, you must use CCM.

Title does not transfer until settlement, therefore, income is reported and basis is deducted at settlement. For both available methods, Spec Home Rules and CCM, all the direct and indirect costs are accumulated. These costs are called the basis of the property and cannot be deducted until the home is sold. The costs that must be included in the basis of the home are:

  • Land
  • Materials
  • Labor, and
  • Allocated indirect costs (See table of indirect costs)

Custom Homes Built on Buyer's Land

A custom home built on land owned by the buyer is a construction contract because the home must be built to fulfill the contract with the buyer. Title to the work transfers as it is performed. Homebuilders usually receive advance payments and may use accrual, PCM, or CCM methods.

  • If you use accrual, you will report income when you are entitled to receive it and deduct expenses when they are incurred.
  • If you use PCM, then your direct and indirect job costs are used to compute the income from the contract and all the costs are currently deductible. (See table of indirect costs)
  • If you use CCM, any income received under the contract is deferred until the contract is completed. All costs related to the contract are also deferred until closing. The basis is then deducted and all income reported. (See table of indirect costs)

Land Developers

A developer acquires land, obtains approval, secures construction financing, and begins construction of residential developments in stages or phases.

The developer assigns all the direct job costs and an allocated portion of the indirect job costs and the common improvements to each lot in the development. Common improvements include such things as streets, curbs, sidewalks, sewers, etc. (See the table of indirect costs) All of these costs must be matched with the sales price of each lot as it is sold.


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Page Last Reviewed or Updated: 23-Aug-2016