The inventory model
For spec and production homes, every cost from land through the last punch item is capitalized into inventory: land held for development, development costs, lots, homes under construction, finished spec homes. Nothing is cost of sales until the home closes, when the lot cost and the home cost move to cost of sales against the sales revenue. The job cost system is therefore an inventory ledger by lot, and the margin on a home is only known at closing.
| Stage | Balance sheet account | What moves in | What moves out |
|---|---|---|---|
| Land held for development | Inventory | Land purchase, carrying cost | Allocated to lots on platting |
| Development | Inventory | Grading, utilities, roads, permits | Allocated to lots by a method (per lot, per front foot, relative value) |
| Lot inventory | Inventory | Allocated land and development cost | To home under construction at start |
| Home under construction | Inventory (WIP) | Direct construction cost, capitalized interest, upgrades | To finished home or cost of sales at closing |
| Finished spec home | Inventory | Completed home awaiting sale | Cost of sales at closing |
| Model home | Fixed asset or inventory | Model construction and furnishings | Depreciation; sale at community close-out |
- Development cost allocation to lots is the judgment call that determines every lot’s margin; document the method and apply it consistently
- Interest on construction and land loans is capitalized into inventory while development or construction is active
- Custom homes built on the buyer’s lot under a contract are usually percentage-of-completion contracts, not inventory; a builder with both needs both models
Closings, deposits and commissions
At closing the sales price becomes revenue, the lot and home cost become cost of sales, the buyer’s earnest money and upgrade deposits are applied, and commissions, closing costs paid for the buyer and any concessions are recognized. Before closing, buyer deposits are liabilities, not revenue, and option and upgrade selections are tracked by lot so the upgrade revenue and cost are matched at closing.
- Earnest money and selection deposits held as liabilities by lot until closing or forfeiture
- Upgrade and change order revenue tracked by lot, with the cost in the lot’s inventory
- In-house and external realtor commissions recognized at closing with the revenue, and paid at closing
- Closing cost assistance and incentives paid for the buyer are consideration payable to a customer under ASC 606 and generally reduce revenue; brokerage commissions are selling costs. Your CPA sets the presentation
- Warranty reserve accrued at closing as a percentage of revenue, with claims charged against it
Construction draws and cash
Construction lending funds the inventory. A draw schedule ties loan advances to construction stages (foundation, framing, dry-in, mechanicals, finish) per lot, and the lender inspects before each advance. The accounting problem is keeping the loan balance by lot current, matching draws to the costs they fund, and paying off the lot’s loan at closing. Cash flow is the lag between paying trades weekly and drawing monthly, multiplied by the number of starts.
- Set up the draw schedule per lot from the lender’s stage definitions
- Cost codes by stage so costs to date support the draw request
- Request draws as stages complete; record the advance against the lot’s loan
- Track the loan balance, interest and payoff per lot
- At closing, pay off the lot’s loan from proceeds and release the lien
The reports a homebuilder needs
- Gross margin per lot at closing: actual vs. pro forma, with upgrades separated
- Inventory by stage: land, development, lots, homes under construction, finished specs, with aging on specs
- Cost to complete by lot against budget, with committed cost for trade contracts
- Backlog: homes under contract with sales price and expected closing month
- Draw status by lot: advanced, available, loan balance
- Cycle time from permit to closing, by community
- Warranty reserve roll-forward: accrued, claims, balance
How Forge ERP fits a homebuilder
Forge’s Residential / Homebuilder specialization lays out the inventory model in the chart of accounts: land held for development, capitalized development costs, lot inventory WIP, finished spec inventory, model home and sales office assets, homeowner and structural warranty reserves, earnest money and buyer upgrade deposits, HOA start-up fees held, home and lot sales revenue, upgrade and design center revenue, lot and home cost of sales, in-house and realtor commissions, closing costs paid for the buyer, warranty claims and model home operating costs. It adds phase, location, product and customer dimensions and enables procurement, projects, project ledger, cost catalog, estimating, inventory and revenue, so each lot runs as a project with a budget by stage, trade contracts as committed cost, and purchase orders and bills coded to the lot and cost code. Custom homes built under contract can run as percentage-of-completion projects alongside.
Forge ERP covers projects, purchasing, accounts payable, billing and receivables, job cost and WIP, reporting and close. Payroll runs in your payroll provider and lands in Forge as job-costed labor with burden. Forge is in beta with a 14-day free trial.
Frequently asked
- Do homebuilders use percentage of completion?
- Usually not for spec and production homes, which are inventory sold at closing. Custom homes built on a buyer’s lot under a construction contract are generally recognized over time. Many builders need both models in one ledger.
- How should development costs be allocated to lots?
- By a documented method applied consistently: per lot, per front foot, or by relative sales value for communities with varied lot sizes. The method sets every lot’s margin, so agree it with your CPA before the first closing.
- Is a buyer’s deposit revenue?
- No. Earnest money and selection deposits are liabilities until closing, when they are applied to the sales price, or until they are forfeited under the contract.