Construction is an incredibly complex industry with its own unique accounting and bookkeeping requirements. Proper financial record keeping is absolutely crucial for the ongoing success and regulatory compliance of construction businesses. Poor bookkeeping can lead to inaccurate financial statements, incorrect tax filings, missed liens, and ultimately cash flow issues that cripple a contractor.
Here, we'll take an in-depth look at bookkeeping best practices designed specifically for construction companies. Whether you are a contractor looking to upgrade your back-office processes or a bookkeeper servicing construction industry clients, you will learn the essential methods for managing finances in this intricate sector with bookkeeping for construction companies.
Bookkeeping Basics
All construction companies need to follow standard accounting and bookkeeping principles that apply to businesses in every industry. This includes an understanding of fundamental concepts like double-entry bookkeeping, accrual versus cash basis accounting, and the standard financial statements (income statement, balance sheet, statement of cash flows).
Construction bookkeepers also need to be proficient in recording debits and credits, accounts receivable, accounts payable, payroll, fixed assets, and other core bookkeeping responsibilities. But it is critically important to have bookkeeping software built for contractors that can track job costs, handle change orders, bill schedules specific to construction, and integrate with other industry-specialized tools.
Look for bookkeeping systems like Viewpoint, Sage 300 Construction, Jonas Construction, and ComputerEase that are tailored for the complexity of contractor finances.
Job Costing
Job costing is an absolute essential practice in the construction industry. This is the process of tracking all costs associated with a specific project so you know its true profitability. Every construction project must be treated as its own separate business, almost like a subsidiary within the overall company. The job costing process starts with creating a new job in the accounting system, assigning it a code/number, and establishing a budget.
Then as work progresses, all costs related to that project including materials, equipment rentals, labor hours, subcontractors, and any change order overages get coded to the job. A detailed job cost report can then show if total actual expenditures have exceeded the budget, helping inform future bidding. Good job costing means tracking every material receipt to the unit level, vigilantly monitoring labor timesheets, asking subs for detailed invoices, and allocating overhead appropriately. This level of granularity is hard but vital.
Managing Contracts and Retainage
Construction projects often span multiple months or years, so managing contractual terms around billing and retainage is imperative. As work progresses, contractors will issue periodic invoices to the client according to the negotiated payment schedule, typically monthly or upon hitting certain milestones.
Proper bookkeeping demands maintaining compliance with the original contract and change orders, documenting all unpaid receivables, and reconciling advances/deposits from clients. Retention is also common, where the contract states that 5-10% of each invoice will be withheld by the customer until final completion. So retention tracking in the accounting software is crucial.
Bookkeepers need to record the full invoice value as accounts receivable, offset by a contra "retentions receivable" account. Closeout retainage release should be tied to punchlist completion and lien waivers. Overall, disciplined contract administration and billing workflows prevent non-payment disputes and keep cash moving.
Time Tracking and Payroll
Accurate time tracking is imperative for construction contractors to control labor costs and tie payroll directly to specific jobs. Field employees should submit detailed time sheets every day listing hours worked by project. Supervisors must diligently review for accuracy.
Payroll software integrated with job costing allows labor expenses to be automatically coded to the right accounts. However, staff must verify proper job allocation, especially when an employee works on multiple projects in a day. Prevailing wage requirements on public contracts add another compliance layer to payroll.
Using certified payroll services helps guarantee correct payment of local prevailing wages and fringe benefits. Overall, time tracking discipline gives vital data to compare estimated vs. actual job costs for labor factoring into future bids.
Accounts Payable
Managing accounts payable efficiently allows contractors to maximize prompt payment discounts and maintain good vendor relations. A process should be established to ensure all supplier invoices and subcontractor bills are reviewed and entered into the accounting system in a timely fashion.
Costs must be allocated to the right construction job account or overhead expense account. Keep accounts payable aging reports to prioritize payments on terms, taking discounts whenever advantageous. Avoid late fees by reconciling statement balances with open invoices. Try to collect any outstanding receivables due from vendors as well.
Institute approval workflows and issue payments on a regular schedule. Proper AP workflows prevent duplicate payments and lead to substantial savings.
Fixed Assets and Depreciation
Construction relies heavily on fixed assets like heavy equipment, vehicles, buildings, and tools. Asset tracking with unique ID tags, preventative maintenance schedules, and physical inventories are imperative. Calculate depreciation expenses for tax and accounting purposes as assets are put into service according to IRS rules, while also factoring in non-cash expenses like wear and tear. R
epairs should be expensed immediately, while major improvements may need to be capitalized or depreciated over time. Establish policies for routine capitalization thresholds. Consistent fixed asset accounting improves visibility into the real costs of owning and operating physical contractor assets over their lifespans.
Tax Compliance for Contractors
Construction companies face several tax compliance requirements at multiple jurisdictions. Sales and use tax must be tracked on all taxable purchases and collected on sales. Proper filing and remittance procedures based on project locations are essential. Stay current on state and local contractor licensing, permitting, and insurance requirements.
Issue 1099-MISC forms annually for subcontractors exceeding $600 in payments. Deduct all eligible business expenses like materials, tool, equipment, home office, and mileage costs. Work with a CPA or tax professional specialized in the construction industry. Use audit-proof record keeping to survive increased IRS scrutiny of contractor deductions. Don't skimp on compliance, as tax penalties can be extremely costly.
Financial Statements and Reports
Regular financial statement analysis is vital for contractors to assess job profitability and overall company performance. Job cost reports should be run frequently, comparing budget estimates to actuals with detailed line items for examined variance. Beyond project accounting, standard monthly financials like profit and loss statements, balance sheets, and statements of cash flows should be prepared.
Review key metrics like gross margin, days sales outstanding, inventory turnover, and debt leverage. Benchmark against competitors. For deeper insights, incorporate ratio analysis, growth rates, and trend spotting over time. Quality financial reporting helps identify issues early and informs strategic decisions to improve future estimates and manage cash flow in a cyclical industry.
Streamline Your Construction Bookkeeping with Uplinq
As we've explored throughout this article, bookkeeping for construction companies and financial management can be extremely complex. From job costing to payroll to tax compliance, contractors face immense accounting challenges. But you don't have to go it alone. The innovative accounting platform Uplinq is purpose-built to simplify contractor finances.
Uplinq combines advanced AI technology with dedicated accounting experts to deliver automated bookkeeping tailored for construction. It seamlessly integrates with your existing software and bank accounts to import transactions and categorize them rapidly with unparalleled accuracy. Uplinq's real-time reporting provides up-to-date financial insights whenever you need them. Plus, you get ongoing support from a bookkeeper familiar with the construction industry's unique needs.
Say goodbye to bookkeeping headaches and experience the future of AI-powered bookkeeping for construction companies with Uplinq. Schedule a demo today to see how Uplinq can revolutionize accounting for your construction business.
