Accounting for your construction business requires a different approach than other companies. Individual projects can span months or years; income only sometimes appears in your bank account after some time. An accounting system with financial statements can help you decide to support your business goals. These financial reports include the balance sheet, income statement, and cash flow statement.
Recording the day-to-day transactions that comprise your construction company’s financial picture is necessary. You can use a journal, spreadsheets, or accounting software to track the money that flows in and out of your business, such as invoices, payments from clients, payroll, equipment rentals, labor costs, and material purchases. A sound record-keeping system also helps you avoid mistakes and prepare for an audit. Aside from the essential financial records like accounts payable and accounts receivable, construction accounting requires particular elements such as revenue recognition, job costing, and withholding a percentage of contract amounts until the contractor has achieved certain milestones. A client is satisfied with the work completed. It is known as contract retainage and incentivizes contractors to deliver on their promises and improve project profitability.
Since job-centric accounting is so important, a construction business should have a flexible and robust software solution that can quickly and accurately report and categorize contract amounts, estimates, costs, subcontracts, purchase orders, production information, quantity totals, customer information, and billings on a daily, weekly, biweekly, monthly, or semi-monthly basis. In addition, it should also provide a general ledger (G/L) for the company every month and period-to-date accumulators on a daily, weekly, or biweekly basis. This data is a bare minimum to help a company identify areas of profit and loss, plan for the future, and grow.
An accounting technique called job costing aids in proactively managing project expenses and profit margins. It involves breaking down the total estimate of a project into individual line items for labor, materials, and overhead and tracking actual costs on an ongoing basis throughout the life of each job. It allows you to identify problems like cost overruns, poor estimating, or mismanagement of materials. It also gives you the information needed to improve efficiency and profitability. While job costing has many benefits, implementing it can be challenging if you need the right tools. Financial management software makes the process more manageable and more accurate by allowing you to assign expenses to projects using pre-determined job codes so that you can see them in real-time. It also saves you the tedious task of recording every expense manually in a spreadsheet, which leaves room for error.
When appropriately used, job costing provides an up-to-date and comprehensive audit trail of all your receipts, payments, and expenditures. It also gives you an accurate view of how your teams perform on each job and if they are on track to meet or exceed their estimated hours for the project, which translates into lower bills for customers and higher profits for you.
Solid records of contracts, estimates, costs, subcontracts, purchase orders, quantity totals, production information, and customer and billing information are a minimum requirement for construction companies. In addition, the ability to report on these items on a daily, weekly, biweekly, or irregular semi-monthly basis and to generate period-to-date accumulators on a project, year, quarter, or month is essential for tracking progress and making timely decisions to stay on track with the original estimated completion date. As a project-based business, construction firms juggle multiple accounts and constantly changing localities. They also must track time-tracking complications, prevailing wage compliance issues, and unique concepts like certified payroll and time and material billing. Hiring an accounting firm like Porte Brown for construction businesses is essential.
The right accounting firm for construction companies can save money by improving productivity and efficiency. The key is finding a solution that makes it easy for employees to input the correct numbers and categorize transactions properly. It ensures that you aren’t overpaying taxes or missing deductibles and that your books regarding workers’ compensation insurance can be trusted. It’s also essential to have a service that is accessible, understands labor and tax laws, and integrates payroll with accounting. Nothing is more frustrating than calling a payroll service, getting sent to voicemail, and waiting hours or days before your question is answered.
Construction companies incur numerous business costs that can chip away at your bottom line, whether it’s the cost of materials, payroll, or overhead expenses. That’s why it’s essential to separate your finances from those of your company with a dedicated bank account for your construction business. Doing so will make preparing for tax time much easier come filing season. As a construction contractor, you can take advantage of available tax write-offs. Make careful to utilize these deductions, as they can drastically lower your tax liability. Some construction write-offs include travel costs, vehicle expenses, professional fees, insurance, and more. Another big challenge for construction firms is tracking and reporting on their business activities by the IRS’s revenue recognition standards (ASC 606). This accounting standard dictates when a company recognizes its revenues, with options including cash-basis, completed contract, and completion percentage.
Lastly, construction firms must stay on top of their union requirements. Failure to do so could result in costly non-payment consequences, such as the seizure of property to satisfy a tax debt (a levy). Using accounting software to keep tabs on all these complicated financial requirements is crucial. A comprehensive database will make reconciling your bank statements and bookkeeping records easy to ensure all transactions are accurate.