Managing the bookkeeping side of your construction company is challenging. Unlike other industries, construction companies use job cost accounting. Plus, they tend to have unstable materials costs, varying wage rates and workforces, and changes based on a project’s location.
And even if you’re familiar with basic accounting, your construction company may use a form of bookkeeping that’s more complex. Proper construction bookkeeping lets you better understand and control your financial position and cash flow. In this post, we’re explaining the importance of construction bookkeeping. Plus, we’re sharing some pro tips for you to use in your business.
Why Construction Bookkeeping is Important
Construction bookkeeping can be incredibly complex because of the nature of construction work (and the industry).
Where tracking results on a single project is tricky, what’s even more challenging is tracking results across multiple jobs running simultaneously.
Here’s why getting your books right is vital.
1. Customized and Unique Projects
Because no two construction projects are alike, you can’t expect the same results from Project B as Project A. With differences in cost and location, keeping your bookkeeping straight is crucial so you know what you’re spending (and earning) on each project.
2. Direct and Indirect Costs
Direct costs are those tied to a specific project, such as materials, equipment, and labor. Indirect costs are those critical to running your business across all projects, such as manager salaries, safety, warehouse, and training. To account for your expenditures correctly, you must record both cost types.
3. Payroll Considerations
Keeping track of your payroll is a vital bookkeeping function, but it is more complex than cutting paychecks at the end of the week. You’ll want to capture all of your direct labor costs – salary and burden – against a project. Many construction businesses work on projects requiring them to pay workers a prevailing wage – a standardized rate for workers based on classification and location. Taxes, travel allowances, and union rates also impact what you must pay your workers.
4. Contract Retainage
Contract retainage is the amount of money a client can hold back until satisfied with a job. This amount, ranging from 5-10% of a contract’s value, can significantly impact your construction company’s cash flow. If your business manages several projects simultaneously, you must ensure you have enough capital to hold up your end of the deal.
6 Bookkeeping Tips for Construction Companies
Here are our seven tips to help you improve and simplify your construction bookkeeping activities.
1. Enter Transactions in Real Time
It’s common sense to track what you spend. However, only some construction businesses do this efficiently. Ensure you’re consistent, entering transactions promptly so you have as much real-time data as possible.
- Accounts payable — This is where you record your company’s bills, such as insurance, rent, equipment, and utilities.
- Accounts receivable — This includes the details of all payments you receive from clients.
- Job costs — This includes job-related items like materials purchases, subcontractor payments, and payroll.
In case you’re audited, always keep these journals updated and hold onto your receipts for expenditures.
2. Use Job Costing to Manage Projects
Job costing is tracking the costs related to a project, such as materials, labor, and equipment. Luckily, there are numerous software solutions to make job costing more automated and seamless.
3. Understand Contract Retainage and Milestone Payments
For most construction companies, contract retainage can account for up to 10% of the contract value. To ensure you’re not caught off guard, account for this by including information on customer invoices with the retainage value shown as a credit. Be sure to know what the contract says regarding when you can bill for retainage.
4. Understand which Revenue Recognition Method to use
How and when your construction business chooses to record its revenue is an essential component of your bookkeeping strategy. There are three methods commonly used in the construction industry:
- Completed contract method — Using this method, you would only record revenue upon the completion of a project. This is commonly used for short-term projects.
- Installment method — This method involves the recording of revenue as each payment is made by the client.
- Percentage of completion method — This method recognizes revenue as a percentage of the work completed during a reporting period. This method is often used for long-term contracts.
Whichever method you choose, have the systems and processes set up to produce the required data.
5. Leverage Automation Solutions and Construction Accounting Software
It would also benefit your company to automate as much of its bookkeeping as possible. Not only does automation save you time, but it also reduces errors and saves you money in the long term.
For construction companies, many automation solutions integrate with project management software. Plus, there are solutions designed specifically for construction accounting. That being said, it’s not possible to automate the entirety of your bookkeeping and accounting process. You must have checks and balances in place to ensure your automations are happening correctly. That’s where having professionals in your corner comes in handy.
6. Outsource Your Accounting and Bookkeeping Functions
Hiring a professional to manage your construction bookkeeping can save you significant time and money. If you decide to outsource this part of your business, choose a partner wisely.
Because construction has its own unique accounting requirements, search for a firm with a construction accounting specialty. Beyond handling your bookkeeping needs, they should also provide you with high-level financial guidance personalized to your goals.
Get the Construction Financial Help You Need from New Lyfe Accounting
There’s nothing simple about running a construction company, especially when focusing on client service, contractor scheduling, and other challenges. Accounting for construction companies is complex. But, when you do it right, you’ll uncover unique financial opportunities for building a stronger business. At New Lyfe Accounting (NLA), we offer premium financial services to construction clients nationwide. From personalized bookkeeping engagements to holistic CFO partnerships, we’ll help you find the construction accounting service that’s right for your business. For more information on what we have to offer, schedule a free strategy session with us today.