Construction Bookkeeping Services A Step-by-Step Guide

Construction accounting also involves tracking revenues so that you can accurately measure the profitability of your projects. Choosing between the percentage of completion and completed contract methods significantly affects a construction company’s financial reporting and cash flow management. The percentage of completion method offers ongoing insight into project performance and stability, while the completed contract method provides simplicity and potential tax benefits. Understanding these methods is essential for effective financial planning and operational success in the construction industry.

Job Costing and Profitability Analysis

Properly managing and allocating overhead expenses is crucial for contractors, as it directly impacts the company’s profitability and long-term financial stability. Not only will this help you prepare for tax time, but it provides an accurate accounting of profitability for each contract. Your company may manage short- and long-term contracts, often with varying end dates.

Understanding Contractor Compliance: A Guide to Managing Global Contractors

Job costing is a form of project-based accounting that helps construction companies keep construction bookkeeping track of the expenses for a specific job or project. On top of that, construction contracts often include retainage — a portion of the payment that is withheld until the entire project is complete. That means a contractor’s profit margin may be held back long after their portion of the work is complete. On top of that, construction is a notoriously volatile industry with a high failure rate, slow time to payment, and inconsistent cash flow. The best way to stay organized is tracking your day-to-day transactions, reconcile your accounts on a regular basis, and use construction accounting software.

Must-Have Features To Look For In a Construction Accounting Software

The construction industry often faces delayed payments from clients or contractors, creating cash flow issues. Managing progress payments, retainage, and balancing accounts payable and receivable is crucial. A business may have completed work but not receive payment for several months, leading to cash shortages that can delay operations. Construction accounting software simplifies tracking costs and project budgets by offering industry-specific features such as project-based invoicing and labor tracking. Programs like QuickBooks offer customizable options tailored to construction needs, helping firms automate much of their financial management. In construction, cash flow management is often challenging due to project-based billing and delayed payments.

• You need to have accurate bookkeeping not just for the sake of taxes and potential audits, but to monitor your cash flow and ensure you’re being compliant and profitable.
• Withholding retainers can further delay payment, which is why it’s important to accurately track costs and have funds available for shorter pay periods.
• Document management to organize contracts, change orders, and project documentation in one place.
• Here are some things to look for when choosing the right bookkeeping software for your construction business.
• It’ll also give you a good idea of what you’ll be making per project, which can free up cash flow and allow you to leverage the cash in new projects, new rentals, etc.
• Most systems require confusing workarounds with third-party integrations just to be able to use them.

Accounting Basics for Contractors and Construction Businesses

• Each job incurs direct and indirect costs that may fall into a wide range of categories.
• In addition, tracking each project’s profitability can be tricky, particularly compared to other industries where expenses and revenues are lumped together in a single financial statement.
• Imagine the time you could save if your accounting platform could work together with your favorite construction management software.
• A business with a quick ratio above 1 is regarded as liquid, meaning that it has enough cash resources to pay its current liabilities.
• However, all three sections are related, as total assets are equivalent to the sum of liabilities and equity.
• To ensure job costing is accurate, businesses must monitor and track their billing process closely.

The high price and length of construction projects make payment scheduling and collection unique. Indirect costs are those which are essential to running your business across projects. The more projects your construction company manages and the more workers you contract, the more important it is to have your accounts in order. Working capital turnover measures how much revenue each dollar of working capital is producing.

Management should provide oversight to ensure that internal controls are being followed and that any weaknesses are addressed in a timely manner. You’ll also need to take into consideration things like taxes, travel pay, and union rates. Payroll also often includes a variety of bonuses, benefits, and other incentives, such as overtime pay or extra pay for hazardous working conditions.

Contractors and real estate developers use GAAP construction accounting to  increase their financial accountability and provide valuable peace of mind to customers. 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.