How to Do Bookkeeping for Construction

To help avoid this, include a section in the contract that outlines how to handle change orders. Accurately dividing expenses is critical to control costs and measure profitability. Accurate bookkeeping enhances the credibility of construction companies in the eyes of lenders and investors.

• The Internal Revenue Service requires contractors who exceed $10 million in gross receipts to use a percentage of completion method in their accounting practices.
• These tools often include features for job costing, financial statements, progress billing, and WIP reporting.
• As the largest expense on your books, labor costs should be diligently tracked and reconciled.
• It involves tracking hours worked, calculating wages, managing benefits, and ensuring proper tax withholding and reporting.
• Additionally, you should regularly back up your data to prevent any loss of information due to technical issues or cyber-attacks.

Construction Accounting Best Practices

• For those looking to streamline their operations further, explore our post on the best construction apps to enhance your efficiency.
• Payroll processing designed for the Construction Bookkeeping Services  industry, ensuring compliance with union rules, prevailing wages, and other regulations.
• It’s best practice to set a reminder so that you have enough time to complete your tax returns without any mistakes.
• This detailed tracking of project costs enables you to assess which projects are most profitable and where inefficiencies may exist.
• It is crucial to track these different expenses to be a successful construction company.

Finally, due to the complexity of construction projects, unforeseen issues often arise, leading to additional costs or time on the project. If you or your customer hasn’t planned and budgeted for these potential issues, they can cause the entire project to fail. Construction payroll and invoicing help ensure accurate, timely payments to construction workers and subcontractors. Since this is the bread and butter of a contracting business, let’s go into more detail. 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 https://digitaledge.org/the-role-of-construction-bookkeeping-in-improving-business-efficiency/ accounting method is great for small construction businesses that don’t have a high volume of sales or complex transactions.

Completed Contract Method

• Proper bookkeeping ensures transparency, improves financial management, and enables contracting companies to gauge the health of their operations.
• It helps in making informed decisions about future investments and understanding project profitability.
• This isn’t just for audits; errors happen, typos happen and things can get lost.
• It ensures that the contractor meets all requirements and that the customer is satisfied with the performance before delivering the full payment.
• Job costing to track expenses related to specific projects, allowing you to determine profitability on a per-project basis.
• In many ways, the time and materials accounting is the opposite of the fixed price method.
• A business may have completed work but not receive payment for several months, leading to cash shortages that can delay operations.

With better cash flow visibility, businesses can plan expenditures, negotiate supplier terms, and ensure smooth project operations without financial disruptions. One effective way to track expenses is to use accounting software specifically designed for construction companies. Programs such as Sage 100 Contractor and ProContractor by Viewpoint can help with everything from job costing to managing purchase orders. These programs can also help with tracking expenses by project, which can be especially useful for larger construction companies. One of the most important aspects of bookkeeping for construction companies is handling payroll. This involves accurately tracking employee hours, calculating wages, and ensuring that all payroll taxes are paid on time.

• 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.
• Another key benefit of cloud-based solutions is that they provide seamless mobile access for on-site teams.
• Keeping track of payroll is another element where construction bookkeeping is essential.
• These reports offer critical insights into financial health, enabling business owners to make informed decisions, manage risks, and plan for growth effectively.
• Construction contracts are normally paid out on a schedule, as the project progresses, with a portion of it held back until completion.

Step 4: Use Construction-Specific Software

Construction companies should have a system of internal controls in place that includes segregation of duties, regular audits, and oversight by management. To simplify this process, many construction companies use payroll construction bookkeeping software that can automatically calculate wages and taxes. These programs can also help with other aspects of payroll management, such as generating pay stubs and handling direct deposits. If you’re not the bookkeeping type, you may find bookkeeping tasks mundane and frustrating, but getting it right is extremely important. If you don’t intend to hire a professional, follow these best practices for construction bookkeeping to keep your financial records updated. Each business needs to have a general ledger and records of accounts payable and receivable.

Construction business billing methods

Behind that, materials (including supplies and equipment) are a close runner-up. These common financial mistakes can be a construction company’s worst nightmare. They can add up fast, leading to long-term financial struggles and business viability. If you don’t have a bookkeeper, you’ll be responsible for reconciling your bank accounts. Plus, considering customer deposits and processing billings is just as important. This means that construction accounting will vary and requires different processes.

Expense Tracking and Management

Many construction companies, especially small businesses, are working with small accounting departments, or absorb accounting responsibilities into other roles. For custom home builders, every project is different, which means every accounting cycle can change. 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. While it is not the fanciest bookkeeping responsibility, it is one of the most important.