Bookkeeping for Construction Companies: The Ultimate Guide

Gross profit and gross profit margin is a tremendously useful tool that will allow you to measure the efficiency of your jobs, operations, and sales/bidding process. This formula will reveal your “book value” or the value returned to all shareholders after paying debts and liquidating assets. In other words, it’s a measure of ownership in a company or asset after considering all outstanding debts. However, equity isn’t a surefire way to determine your specific value or ownership in a company.

Percentage of Completion Method (POC)

First, prevailing wage payroll may include and sometimes requires non-cash compensation called “fringe benefits,” such as health care or continuing education. Time-and-material billing bases the contract price on a per-hour labor rate plus the actual cost of materials used. For both the labor and materials components, the contractor may apply a standard markup.

Scattered custom projects

• In this in-depth guide, we will explore the key aspects of bookkeeping for construction companies.
• Even if you hire a professional firm, having an automated system that collects and stores the information will make it easier for them to perform your bookkeeping tasks.
• A construction business with gross receipts under $10 million can use the completed contract method on construction projects that last less than two years.
• These types of contracts require thorough, complete, and accurate bookkeeping records.
• To be eligible, contractors can’t exceed a certain average annual revenue, and their contracts must be able to be completed within a set timeframe.

The critical thing to know about construction accounting is that you have to do it regularly. One of the easiest but most important steps to follow is maintaining daily records. It’s a lot more difficult for you to track the financial position of your business if you don’t keep accurate https://www.merchantcircle.com/blogs/raheemhanan-deltona-fl/2024/12/How-Construction-Bookkeeping-Services-Can-Streamline-Your-Projects/2874359 records. Retainage methods vary from state to state, but the owner can retain for more than a year in some cases. In addition, a retention rate of 5-10% can affect the contractor’s profits by 20-50%. Retainage tracking is substantial in construction accounting due to the tight profit margins in the industry.

Analyze and fix the best tax strategy

With that said, the chart of accounts then lists all accounts so you can record and organize all activity happening in your general ledger. This forms the basis for creating general ledger accounts before posting transactions. For this reason, a chart of accounts is a foundational accounting tool for providing the accuracy and structure needed to understand every transaction in your business. As Warren Buffet said, “Accounting is the language of business.” From this language, your financial statements tell a story about your business. It’s a comprehensive list of all account numbers and names relevant to your operation.

How to do Construction Accounting: 5 Easy Steps

• Therefore, it is essential for construction companies to keep accurate records of all financial transactions and to file their taxes on time.
• At any rate, do everything in your power to have an all-encompassing database that helps you keep track of things.
• One of these is that revenues are earned either by various projects or contracts with a long timespan.
• It allows you to estimate labor, material, and overhead cost, as well as determine how much you should charge for the project.
• However, construction accounting is project-centric and production is decentralized, because of which it takes time and effort to track costs for specific projects, and production activities.
• With these considerations in mind, let’s get into the arguably most relevant topic of construction accounting — job costing.
• Regardless of the option you choose for your bookkeeping needs, it is useful to understand the process involved in construction bookkeeping.

Contractors can usually determine their needs by checking with their local union manager, especially if they are moving to another jurisdiction. This invoice usually consists of a signed summary sheet and a statement of value detailing what has been completed and accounted for. When the contractor gets the right and fully fulfills the contract, the contractor issues the invoice and moves it from the asset account to the accounts receivable account for collection. Usually, a general ledger is maintained to allow you to track transactions that affect the financial position of your entire company. You’ll also need to account for contract retainers, usually 5-10 percent of the contract amount.

To qualify, the contractor must not exceed the given annual sales, and the contract should be finished within the specified time frame. Finally, partners or owners of construction firms need to consider the tax How Construction Bookkeeping Services Can Streamline Your Projects implications of their business structures. If you do this, you allow breathing room in between phases, tasks, and projects.

• All of these factors make construction bookkeeping an essential element for businesses.
• Giving you the power to predict the financial future and growth of your business.
• This helps streamline the process of setting up and managing the chart of accounts in both systems.
• Although it’s sometimes challenging, you can significantly simplify bookkeeping by hiring a bookkeeper or accountant to handle it for you.
• Speaking of which, job costing concerns itself with 2 types of costs — direct and indirect costs.