There is no one-size-fits-all when it comes to bookkeeping. Every small business needs a bookkeeping system that takes into account all the variables that make that business unique.
Construction companies are no exception. In fact, a bookkeeping system that tailors to the construction industry is even more crucial to the success of its business due to the fact that there are so many variables that come into play with each specific job.
So, how do you ensure each individual job is profitable? The key is setting up an efficient bookkeeping system that is unique to the specific needs of your construction business.
Here are the key takeaways on bookkeeping for construction companies:
- Construction bookkeeping needs to be tailored to the unique requirements of the industry.
- Construction projects have various variables, making it important to have an efficient bookkeeping system.
- Construction bookkeeping differs from other industries due to project-based nature, varying contract lengths, and fluctuating overhead expenses.
- Tips for construction bookkeeping: separate journals for payables, receivables, and job costing; use job costs to determine project costs; designate different bank accounts for different purposes; account for contract retainage on invoices; use milestone payments for cash flow; base and annual revenue recognition on contract length; automate bookkeeping with accounting software; consider hiring a professional.
- Construction bookkeeping is crucial for organizing information, tracking variables, and ensuring accurate financials.
This article will teach you how construction bookkeeping differs from bookkeeping in other industries and we share construction bookkeeping tips on how to make your construction bookkeeping solution an easier process.
How does construction bookkeeping differ from bookkeeping in other industries?
Construction companies are built around a per project basis. The biggest hiccup here is that no two projects are ever the same. Every project comes with its own unique requirements and challenges.
Project based vs product or service based
Most industries are either product or service based, but project based industries typically include both. This includes sourcing materials, labor, consulting, engineering, and more. This means meticulously tracking business expenses in each category in order to clear a reasonable profit margin.
Length of contract
Project based industries also need to account for potential dry spells in between projects or quick jobs in succession. That means construction companies need to take this into account when determining upfront payments or paying expenses. The length of construction projects make the scheduling and collection of payments a tricky aspect that is very unique to the construction industry.
Not only that, but contracts vary in length from one job to another. That means that money isn’t coming into the construction company at the same time every month. Therefore, the bookkeeping system needs to be flexible, yet organized enough to pinpoint cash flow when needed.
Constantly stay on top of overhead expenses
Since many construction companies deal with a per pricing project cost, pricing can fluctuate in the same categories from one project to the next due to fluctuating prices in the marketplace. Insurance premiums, the cost of materials, subcontractor fees, and equipment costs and rentals can all change at any time affecting the bottom line of each individual project.
Therefore, when bidding on construction projects, each and every cost of the project must be carefully analyzed by checking current market prices to make sure you will come out ahead. Not only is the construction industry susceptible to economic fluctuations, but also political, the weather, and the seasons.
Bookkeeping tips that will account for the uniqueness of the construction industry
While a bookkeeping job is different from the construction industry, to help ease the accounting and financial management process, here are some tips that will alleviate some frustration and save you some time.
Tip #1: Keep separate journals for accounts payable, accounts receivables, and job costing
The key here is to hang on to all of your business receipts. These receipts will give you a good indication as to where your money is going and will be your lifeline if you are ever audited.
See also: Cash Receipts Journal: Meaning, Steps, Examples
The following are the three journals and what they should include:
- Accounts payable includes all of your company’s bills such as insurance, rent, utilities, and rental equipment.
- Accounts receivable includes payments from clients detailing the date, amount, client’s name, and outstanding balance, if applicable.
- Job costing includes material purchases, subcontractor payments, and payroll.
It’s important to set aside time to keep these journals always up to date so that you can easily track business documents and business receipts at any given time. These journals will be a key component of your bookkeeping records.
Receipt management is an important aspect of keeping track of business expenses and receipts. With a service like Shoeboxed, you can outsource receipt scanning and integrate receipt data to QuickBooks Online or other popular accounting software. With Shoeboxed’s Magic Envelope service, you can stuff receipts into a postage-paid envelope that you can keep on the dashboard of your company vehicle, collecting receipts as you go. At the end of the month, send in your envelope to get processed—and get notified when all your data is in your account.
Tip #2: Use job costs to determine project costs
Job costing is a process that helps construction companies determine how much to charge for each project. This is done by estimating such job costs as overhead costs, labor costs, and material costs. You need to create a list of tasks required for each phase of the project and then divide the tasks into the three expense categories.
Joist’s solutions for construction estimating make that an easy task. Thanks to their software, construction companies can build and send estimates and invoices from any device.
Construction work would include the following three expense categories:
- Labor is determined by multiplying your workers’ daily rate by the number of days estimated to complete the project.
- Materials are calculated by adding company costs such as the direct and indirect costs of the project together.
- Overhead costs are determined by adding rent, utilities, in-office salaries, professional fees, travel costs, advertising, and marketing expenses together.
When working in your general ledger, be sure to add your income and expenses for each project. This will give you a snapshot of your net and gross income.
Tip #3: Designate different business bank accounts for different purposes
First and foremost, whether you’re talking about construction accounting or any other business, be sure to separate your personal and business finances by opening a separate business bank account. This will make it so much easier at tax time when you’re trying to account for all of your business expenses during your tax preparation.
Having all of your construction company’s money in one account leads to a lot of frustration and confusion. If you have different accounts designated specifically for payroll, taxes, payments received from clients, and expenses, then you will have a better picture of where the company stands financially.
This specifically includes how much money is coming in and from where and how much is going out and to what. This gives you a much more accurate financial picture of your company at any given time.
Tip #4: Be sure your construction bookkeeping system accounts for contract retainage on your invoices
Contract retainage is a portion of the final payment withheld until a later date to ensure the contractor has correctly and completely finished a construction project. This is typically 5-10% of the contract price.
The best way to account for this is to include this information on your invoices. To do this, include information on your milestone payment and the amount. Then include a second set of numbers that reflect the retainage value which should be shown as a credit. This results in the actual amount the client owes you. The final invoice will reflect the full value of the retainage.
Tip #5: Use milestone payments to enhance cash flow for construction businesses
Projects are broken down into stages or milestones. Payments are then paid out after reaching each designated stage. This is a much better payment plan than getting paid in a lump sum at the end of a project. Having money flowing in periodically throughout the project significantly enhances your cash flow.
Tip #6: Base your revenue recognition method on the length of the contract
Recording and determining when revenue is recognized is another important aspect of the construction business accounting process. A construction company would tend to use the following three methods for revenue recognition during its construction accounting process:
- Completed construction contracts are typically used by most businesses for short-term contracts. Revenue is recognized after completing a project or after a completed contract. Not only are you delaying revenue recognition, but you are also deferring the recognition of any related income tax.
- The installment method is used by many contractors when clients make payments over time. Revenue is recorded as soon as it is received from the client and in the construction accounting period that it is received.
- The percentage of completed contract is typically used for long-term projects in construction businesses. This method entails an ongoing recognition of revenue which results in a percentage of work completed in each accounting period. This way you can better keep track of gains and losses from one accounting period to another.
Tip #7: Automate your construction bookkeeping by using accounting software
One of the best things you can do is to automate your construction bookkeeping. This will help save time, frustration, and alleviate human error. As mentioned previously, construction companies are a very specialized industry and most accounting software provides somewhat standardized bookkeeping services. QuickBooks Online is one example of accounting software that automates the bookkeeping process.
However, there are some bookkeeping software programs on the market that are more geared for construction accounting than others. But, even with general bookkeeping software, most will track expenses, manage payroll, generate financial reports such as expense reports & balance sheets, categorize transactions, reconcile your bank account, and handle billing and invoicing.
With most, you can even link your business bank account to the accounting software so that it is keeping track of your daily transactions and they are automatically being recorded and updated. This is especially helpful when trying to stay on top of your financial records. That in itself will save you a lot of time and money.
Another benefit to automating your construction accounting is that it is highly recommended that you pay quarterly taxes to minimize your tax burden during tax time. The accounting software will also calculate your estimated payments.
Tip #8: Hire a professional if you need bookkeeping for construction
Since there are so many variables and each project is different, hiring a professional with industry experience for your bookkeeping and accounting services can really take a load off for many small business owners.
Having someone meet your bookkeeping needs by providing basic bookkeeping services, such as the monthly bookkeeping, can free up a significant amount of time so that you can focus on the more important aspects of your business like sales and growing your business.
Why is construction bookkeeping important?
The construction industry is a complex industry with many different variables affecting it at each phase. Not only are there so many variables to keep track of but multiple projects are also being performed at multiple locations. That’s a lot to keep up with!
Bookkeeping will keep all of this information organized so that it is easily accessible and up-to-date. More specifically, construction bookkeeping will take into account all of the variables that are specific to the construction industry which will result in accurate bookkeeping and accurate financials. Efficient and effective construction bookkeeping is more likely to lead to a more successful construction company, which means more money in your pocket.
Caryl Ramsey has years of experience assisting in different aspects of bookkeeping, taxes, and customer service. She uses a variety of accounting software for setting up client information, reconciling accounts, coding expenses, running financial reports, and preparing tax returns. She is also experienced in setting up corporations with the State Corporation Commission and the IRS.
You might also like:
- Accounting for Contractor: A Beginner’s Guide
- Bookkeeping for Independent Contractors: Guide and FAQs
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