Construction Bookkeeping Tips to Maximize Contractor Success

As a result, job cost tracking and contract management is crucial, which some general accounting software solutions may not be able to offer. Construction bookkeeping stands apart due to the industry’s complexity and project-based nature. Unlike standard businesses where transactions are often repetitive and straightforward, construction bookkeeping involves tracking multiple projects, each with its own set of budgets, costs, and timelines. This means construction bookkeeping must accommodate fluctuating material costs, varying labor rates, and the unique challenges of managing subcontractors. Additionally, construction companies often use specialized billing methods like progress billing, retainage, and change orders, which require more detailed tracking than traditional invoicing. A construction accountant does what other accountants do, applying generally accepted accounting principles (GAAP) to construction businesses.

How to account for construction

For clarity, job costing focuses on the project level — it’s like zooming in to one project in a company. Conversely, the general ledger keeps tabs on the bigger financial picture — it’s like zooming out on all projects in a company. With these considerations in mind, let’s get into the arguably most relevant topic of construction accounting — job costing. In simple terms, the contractor records the earned revenue each time they issue an invoice. Preferred by many construction contractors, the completed-contract method allows them to defer taxable revenue for the current year if the contract is set to be completed within the following tax year. It’s also true that this method is flexible and simple, leading to less confusion in financial statements.

Job Costing

The prevailing wage simply means the standard hourly rate for a worker in a particular locality or state — as determined by the Department of Labor of that state or by local regulatory agencies. Therefore, the payroll needs to adapt to the changing site conditions and other requirements on the go. To help you assess the major advantages and disadvantages of each billing method, here’s a quick visual summary. With these important considerations out of the way, let’s look at how it all seeps into construction billing.

Tips for Handling Your Construction Accounting Processes

Overbilling and underbilling can significantly affect job costing in a construction business. This core performance indicator helps track the progress of each job in relation to billing. This method allows contractors to accurately report their financial position at any given point in time since all transactions are taken into account on an accrual basis. This method assumes that a construction company records costs and revenue after they finish the job rather than incrementally throughout the project.

This approach reduces your tax burden at the end of the project and protects you from the risk of tax fluctuations. On the other hand, if you prefer to defer your taxes, the next method may be a better option for you. To be prepared to manage construction accounting and finances for a business, accounting professionals and owners/executives should be aware of some of the challenges they may face in their role. Let’s learn more about some of the construction-related challenges that can make construction accounting difficult to manage. While most businesses have fairly stable overhead costs, (fixed costs are pre-determined and variable costs are tied to production levels), construction businesses, conversely, face more volatility in fluctuating costs. Monitoring federal and state tax amendments and understanding property tax implications are crucial.

Tip #10: Be wary of contract retainage

One of the most popular billing methods, fixed-price billing, is based on a detailed estimate that provides the total cost of a project. Unlike other billing methods, fixed-price billing means that the client and construction company agree to a set price for the services at the onset of a https://azbigmedia.com/real-estate/commercial-real-estate/construction/how-to-leverage-construction-bookkeeping-to-streamline-financial-control/ project — thus the name fixed price. To ensure job costing is accurate, businesses must monitor and track their billing process closely.

Project Based

Construction bookkeeping services improve cash flow by ensuring timely invoicing, tracking progress billing, and managing expenses. Cash flow management is vital in the construction industry, especially as you take on larger projects or multiple jobs. A cost-coding system is essential for tracking construction project expenses such as labor, materials, subcontractors, and equipment.

• This is one reason it has received several industry awards, including Software Advice’s 2021 Front Runner award and making Capterra’s Shortlist.
• Moreover, training sessions help agents optimize their expense management strategies.
• While mastering job costing might help you track project expenses, navigating the labyrinthine world of construction taxes can feel like building a tower with blindfolds.
• According to the Construction Financial Management Association, pre-tax net profits average between just 1.4% and 3.5% for contractors and subcontractors.

Alternatively, you can talk with other business owners and ask if they can recommend a certified accountant. Additionally, while a non-certified accountant could handle some of your bookkeeping needs, you should focus on certified and licensed accountants to stay on the safe side. Once you complete the project, you can then issue a final invoice for the entire value of the retainage. The simplest way to account for retainage is to include two sets of information on your invoices. As we mentioned earlier, contract retainage can account for 5 to 10 percent of your contract value.

Construction bookkeeping services can help in setting up systems to track income and expenses efficiently, providing timely reports to help you stay on top of your finances. Effective construction bookkeeping is not just a compliance necessity; it’s a strategic asset that drives profitability, fuels growth, and How to leverage construction bookkeeping to streamline financial control empowers informed decision-making. By implementing the tips and best accounting software recommendations mentioned above, you can build a secure financial foundation for your construction business and ensure its success in the ever-evolving industry. This method gives contractors a better understanding of whether or not their projects will be profitable before the project is completed.