What Costs Are Capitalized During Construction?

Managing a construction project comes with a lot of moving parts—construction accounting being one of them. It’s not the most exciting task, but it’s definitely something that needs attention. The tricky part is figuring out what costs should be capitalized, and why that matters for the success of your project. It’s more than just materials and labor—some costs need to be capitalized to reflect the true value of a project. But what does that even mean, and why does it matter?

In this blog, we’ll go over the basics of capitalizing costs in construction, so you can avoid confusion and ensure your finances are in order. We’ll also show you how Truss Payments can simplify this process and save you time, so you can focus on the work at hand, not the paperwork.

Key Takeaways:

• Learn which construction costs should be capitalized under GAAP accounting rules for capitalizing labor.
• Understand the difference between capitalized costs and expenses.
• Discover how Truss Payments can automate cost tracking, saving you time and reducing errors.

What Costs Can Be Capitalized on a Project?

Let’s dive into capitalizing costs during construction. When you capitalize a cost, you’re adding it to the overall project cost rather than counting it as an expense right away. This method helps you spread out expenses over time, giving you a better picture of the project's financial health as it progresses.

Now, let’s break down the key costs that can be capitalized:

Labor Costs – The People Doing the Work

When you pay workers to physically work on-site, like those laying concrete or the foreman

managing the crew, their wages are capitalized. This is straightforward: their work is

essential to the project.

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However, administrative labor like office staff or payroll employees don’t count. They’re

important to your business but not directly tied to the construction itself, so their costs are

treated separately.

Materials and Equipment – The Essentials

Anything you buy that goes directly into the project—whether it’s concrete, steel, or tools—gets capitalized. This includes the cost of equipment you purchase or rent to use specifically for the project.

But things like office supplies or furniture? Those are regular business expenses and aren’t part of the capitalized cost for the project. Focus on materials and equipment that contribute directly to building the project.

Subcontractor Costs – The Experts You Bring In

Subcontractors play a major role in many projects, whether they’re handling plumbing, electrical, or HVAC. The costs for their services are capitalized because their work is crucial to completing the project.

But remember: if the subcontractor’s work is unrelated to the construction project—like handling maintenance for your office building—that cost isn’t capitalized. Only the work directly tied to the project counts.

Permits and Fees – The Necessary Paperwork

While it may not seem directly related to building, permits and fees are required to get your project off the ground. Zoning fees, building permits, and inspection charges are all capitalized because they are legally required to proceed with the project.

On the other hand, fees that are part of running your business, like general business licenses or maintenance, should be treated as expenses, not capitalized costs.

Financing Costs – Interest on Loans

If you’re financing the project, you can capitalize the interest costs during the construction phase. Since the interest is tied directly to funding the project, it gets added to the project’s cost.

Once the project is completed, though, the interest becomes an expense, so it no longer counts as a capitalized cost. For the time the project is still under construction, though, that interest is part of the overall project budget.

Capitalizing vs. Expensing: What’s the Difference?

Now that we’ve covered what can be capitalized, let’s talk about the difference between capitalized costs and expensed costs.

• Capitalized Costs: These are the costs that contribute to the long-term value of the project. Labor, materials, subcontractor costs—these are all added to the total value of the project and depreciated over time.
• Expensed Costs: These are the day-to-day operational costs that don’t add value to the project long-term. Office supplies, general business expenses, or marketing costs are examples of expenses that get deducted from your profit immediately.

The key takeaway: If the cost helps build or improve the project, it’s capitalized. If it’s just an operational cost, it’s expensed.

How Truss Payments Can Help

Keeping track of which costs to capitalize and which to expense can quickly become overwhelming. Fortunately, Truss Payments makes it easy. With automated tools that track labor, materials, and subcontractor costs, you can ensure that everything is categorized correctly in real-time.

The platform helps reduce human error, saves time, and gives you better visibility into your finances. No more digging through receipts or wondering whether that cost should be capitalized or not.

FAQs:

What costs are typically capitalized in construction?
Labor, materials, equipment, subcontractor costs, permits, and financing costs are typically capitalized as they directly contribute to the completion of the project.

How do I know if a cost should be capitalized or expensed?
If the cost directly contributes to the construction or value of the project, it should be capitalized. If it’s a general business cost or unrelated to the physical construction, it should be expensed.

Can I capitalize interest on loans for construction projects?
Yes, the interest on loans taken to finance the project can be capitalized during the construction phase. Once the project is complete, it becomes an expense.

Can Truss Payments help me track capitalized costs?
Absolutely. Truss Payments automates the process, helping you track and categorize costs as capitalized or expensed automatically, reducing the risk of errors.

Capitalization During Construction

Capitalizing costs during construction isn’t just a matter of keeping your books straight—it’s a crucial step in making sure your project stays on budget and your finances remain accurate. Understanding which costs to capitalize vs. expensing them is key. It keeps your finances organized and helps avoid any surprises down the road.

Honestly, keeping track of all this can be tough, but Truss Payments makes it easier. We’ll handle the financial tracking so you can spend more time building your projects. 

Get started with Truss Payments today and make your construction accounting less of a headache.

Disclaimer: Truss provides tools to help contractors manage and streamline payments. However, Truss is not responsible for financial, legal, or employment decisions made by its users. Always consult with an accountant or legal professional for personalized advice.

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