Construction Accounting 101: A Simple Guide for Contractors

In the end, the goal is to help contractors identify their true costs and profitability, which is otherwise very difficult to do in an industry with so many variables from contract-to-contract. In construction, production contracts can last years and have multiple extended payments over that time. Construction contractors, however, need to treat each construction project as a unique, short-term profit center because each construction project tends to have unique inputs and requirements.

• It is a way to forecast a project’s costs by estimating things such as contractors, materials and supplies, and overhead.
• However, the more projects you have on the go and the more people that work for you, the more you need to have a reliable bookkeeping process.
• It helps in making informed decisions about future investments and understanding project profitability.
• Before choosing a bookkeeping software, ask if they offer a free trial and use that time to get familiar with the way it works.
• One way to mitigate this problem is to structure contracts with the profit evenly distributed rather than front-loaded.
• Implement systems to ensure invoices are sent promptly and accurately reflect the work completed.
• Since 15 percent of the expected costs have been incurred, the company will also recognize 15 percent of the expected revenue and expected profit on its books.

How to Bookkeep for a Construction Company

Without good bookkeeping, you risk going over budget on projects and not having the cash flow to cover your expenses. Often, construction companies have several projects on the go in different areas. Businesses that work in other provinces or even in the U.S. have additional costs to consider, such as tax payments. However, the more projects you have on the go and the more people that work for you, the more you need to have a reliable bookkeeping process. Cash accrual accounting recognizes expenses and revenue in the time they are incurred before any money changes hands. The advantage of the accrual method is that it includes accounts receivables and account payables, as a result, provides a more accurate picture of the profitability of a company.

Finding a Construction Bookkeeping Solution

Overlaps in labor, equipment, and material usage further complicate bookkeeping. Improving your process starts with understanding how construction accounting is unique, and determining the different types of job costs you can incur on each project. Job costing is a method for allocating expenses and revenue to each specific job. Not only will this help you prepare for tax time, but it provides an accurate accounting of profitability for each contract. By leveraging digital invoice capture and automated approval workflows, you can streamline your invoice processing and payment cycles while eliminating the need for manual data entry.

Maintaining a Separate Business Account

Before choosing a bookkeeping software, ask if they offer a free trial and use that time to get familiar with the way it works. On the other hand, if it’s super easy to use but doesn’t provide the flexibility you need, you should consider trying a different one. You’ll also need to account for contract retainers, usually 5-10 percent of the contract amount. The money that a client holds until the project has been completed satisfactorily is generally put into an asset account called a Accounts Receivable Retainage or Retainage Dues account.

• A balance sheet is an overview of a company’s finances, including assets, liabilities, and equity.
• Job costing also helps you determine which types of projects are profitable and which ones to avoid.
• In most industries, commissioned contractors get paid upon delivery of a product or service.
• These experts possess in-depth knowledge and expertise in handling complex financial responsibilities such as job costing, payroll taxes, and reporting.
• Construction contractors, however, need to treat each construction project as a unique, short-term profit center because each construction project tends to have unique inputs and requirements.

Accounting ratios are calculations that a construction business can use to get an overview of its financial health. There are dozens of accounting ratios that look into various aspects of a company’s finances. Below are several of the most common accounting ratios, including the current ratio, quick ratio, debt-to-equity ratio, and working capital turnover. Overhead costs, which are essential for operation but not tied to a specific project, are listed on a separate area of the income sheet. Properly managing and allocating overhead expenses is crucial for contractors, as it directly impacts the company’s profitability and long-term financial stability. Many construction contracts include retainage — also called retention — which is a percentage of the payment withheld for a specific period of time, often until the entire project is completed.

How to Record Construction Expenses

That’s where job costing and the job cost ledger provide powerful tools for construction accounting. Job costing creates a powerful cycle where previous financial data leads to better financial decisions in the future. All of these construction bookkeeping factors can lead to irregular cash flow cycles and difficult financial management for construction companies.

Accounting & construction contracts

Regardless of the type of payment schedule you use for each contract, long-term contracts require meticulous bookkeeping records. Handling your own accounting and bookkeeping is doable but it’s time-consuming and requires a deep understanding of bookkeeping rules in the construction industry. We advise on better financial recordkeeping, suggest ways to improve payroll management, and even help you identify opportunities for growth. Construction accounting software can perform complex functions that help you with tax compliance, and keep track of revenues and expenses on each job site. The Percentage of Completion Method (PCM) that are used to recognize revenues, expenses, and taxes over the life of the construction contract based on its completion percentage. For example, if the contract is 50% complete then the contractor will recognize half of the revenues, costs, and income.