A Guide to Construction Bookkeeping

Construction accounting is a specialized type of accounting that focuses on the unique aspects of construction projects. It involves tracking the financial transactions related to the construction process, https://digitaledge.org/the-role-of-construction-bookkeeping-in-improving-business-efficiency/ such as costs, revenues, and expenses. In general, a construction business with gross receipts (also known as Business Tax Receipts) over $10 million must use the percentage of completion revenue recognition method for tax purposes. A construction business with gross receipts under $10 million can use the completed contract method on construction projects that last less than two years. They’re only required to use the percentage of completion method for construction contracts that extend over two years. Use a journal, spreadsheets, or construction accounting software to record day-to-day transactions like accounts payable, accounts receivable, labor costs, and material costs incurred.

• The installment method is usually used when your client makes payments over time.
• To ensure you aren’t surprised by a customer withholding part of the fee you’re owed, make sure you account for contract retainage properly when budgeting for a project and invoicing clients.
• Bookkeeping for construction firms requires an understanding of these specialized needs, which is the first step toward healthier finances.
• In the United States, the authoritative literature on Construction accounting is AICPA Statement of Position SOP 81-1.
• For one, payroll for construction is more complex, and involves much more than agreeing on a flat rate for every project.
• On top of that, construction is a notoriously volatile industry with a high failure rate, slow time to payment, and inconsistent cash flow.

What makes bookkeeping for construction companies different?

Follow this resource step-by-step to establish an effective accounting process, avoid costly mistakes, and make more money. The high price and length of construction projects make payment scheduling and collection unique. This software is best for those who manage construction projects on real estate that they own or lease. Sage Intacct Construction and Sage Intacct Real Estate is designed for contractors and owners to be able to manage properties and projects effectively. When it comes to real estate management, the platform takes static information, such as lease contracts, and transforms them into dynamic information resources.

Failing to separate personal and business expenses

Today’s leading construction accounting platforms offer standard security features including data encryption, secure credential tokenization and more. While human error will always play some role in security breaches, you can be confident in your accounting platform when it comes to keeping your information safe. Construction companies should use a percentage-of-completion method that recognizes both revenue and expenses as they are accumulated over time. It aligns with the project completion ratio and most lenders or guarantors require this. This helps make sure that information is current and that nothing is forgotten.

Monitor work-in-progress (WIP) reports

• Establishing a strong presence in the construction industry requires completing projects within the specified timeframe.
• Before choosing a bookkeeping software, ask if they offer a free trial and use that time to get familiar with the way it works.
• This is best for contractors who want to integrate an accounting and project management platform with construction drawing and output.
• To ensure compliance, construction companies should consider hiring a tax professional or a bookkeeper who is knowledgeable in tax laws.
• The fluctuating cost and availability of production require you to plan and track costs more attentively.
• Across the construction industry, average working capital turnover ranges from 5 to 15 depending on specialization.

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. While many contractors manage their finances, it’s always advisable to seek professional assistance when needed. Professional construction bookkeeping services can offer expert guidance, ensuring that your finances are in order, taxes are managed efficiently, and business growth is well-supported. Construction accounting can be complex due to project-based structures, long-term contracts, hiring subcontractors, and variable costs.

• If you want to get a true picture of your overhead, you need to be able to split your accounts in ways that offer more granular details.
• A balance sheet is an overview of a company’s finances, including assets, liabilities, and equity.
• You can go to a bank or credit union to set up a company checking account that suits the needs of your firm.
• In many cases, you need to have your financial records for at least three to seven years (varying by state and type of record) so losing them would cause a lot of problems.
• However, bookkeeping for construction companies can be complex and challenging.

Although it’s sometimes challenging, you can significantly simplify bookkeeping by hiring a bookkeeper or accountant to handle it for you. Some solutions, like Hubstaff, offer a free trial to provide you with an opportunity to test the software and determine if it’s the right fit for your needs. If you decide to hire an accountant, look for one with experience in your industry because they’ll know how to handle your company’s accounting needs most effectively.

Based on the project’s necessary job types and activities, you’ll be paying varying rates. It’s important to pay attention to job costing, as it can allow project managers and supervisors to accurately budget for future projects and determine how to improve estimates. Withholding retainers can further delay payment, which is why it’s important to accurately track costs and have funds available for shorter pay periods. Payment scheduling and collection are subject to different circumstances in the construction industry, making proper bookkeeping essential. Many construction firms enter into government contracts, where paperwork and records are essential to getting paid.

Essential documents in construction accounting

Market conditions, supply chain disruptions, and seasonal variations can cause unexpected cost increases, making it difficult to stick to budgets. For one, there’s a large variety of financial transactions in the construction industry. With the steps in this guide, you have everything you need to do construction accounting for your company the right way. For those looking to streamline their operations further, explore our post on the best construction apps to enhance your efficiency. This will make it easy for you to send invoices online, track expenses, monitor payment status, generate financial reports, and more. The average hourly rate for an accountant in the U.S. is about $35, making it quite affordable for the average owner.

Solutions

It is why it is best to use software suited to job costing for construction projects. Consider the cost of insurance, travel, workers’ compensation, materials, subcontractors, equipment, and more. You will need to factor this into your construction accounting for each construction project and for the business as a whole. To effectively manage these variable expenses, you can use FreshBooks Project Accounting Software which lets you track project financials and create reports quickly and easily. Accurately tracking costs, revenues, and other financial data creates a foundation for companies to grow and stay cash The Importance of Construction Bookkeeping For Streamlining Business Operations flow positive. Given the unique financial challenges that construction businesses face, well-developed accounting processes are essential for executives to allocate financial resources efficiently.

Industry workshops offer insights into the latest real estate accounting practices. A cloud-based solution makes it easier to access your financial records because the information is stored on an external server. Using a cloud-based service also ensures the security of your information because it is encrypted and safe from hackers, power outages, disasters, or computer malfunctions. 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.