How to Do Accounting for Your Construction Business 8 Steps

For contractors managing several projects simultaneously, tracking costs and ensuring profitability for each one can be overwhelming. Overlaps in labor, equipment, and material usage further complicate bookkeeping. With the PCM, construction companies can more accurately match their revenue and expenses to the same accounting period, improving their overall financial reporting. Each construction accounting method provides valuable insight into a project’s financial impact that helps ensure projects stay on track, on budget, and succeed. When choosing the right accounting method, you should consider your business’s unique needs and objectives. Start with detailed estimates, track expenses in real time, and use accounting software to generate cost reports.

• Generally, contract retainage is specified in the contract and is a percentage, typically five to 10 percent, of the total contract amount.
• This method should be used if revenues and costs of a project can be accurately estimated and all parties involved are expected to be able to complete all of their respective duties.
• Milestone payments ensure that money is coming in throughout the project, reducing reliance on lump-sum payments at the end.
• Accrual accounting is beneficial for contractors because it allows them to track their expenses and earnings in real time, giving them a better understanding of their financial situation and cash flow.
• Together, these documents are considered an “application” for payment because the recipient will have a chance to review the schedule of values and either accept or dispute the billed amount.

Break Down Project Costs—Job Costing

As a result, contractors in multiple jurisdictions have to watch out for double taxation. Managing different wage scales across jurisdictions requires careful attention to wage and hour laws. Prevailing wage legislation requires contractors to pay the rate of compensation that’s standard, or “prevails,” for each worker classification on similar jobs in the area. Construction firms who work on public projects commonly have to navigate prevailing wage payroll, often called “Davis-Bacon payroll” after the landmark Davis-Bacon Act. Construction payroll systems must be able to handle these complex payroll scenarios, and many contractors use specialized payroll software to manage their payroll needs.

Construction payroll

Simply put, construction bookkeeping is the systematic recording, maintaining, and analyzing of financial transactions related to a construction project. Of course, if you want to make your life easier, construction accounting software like CrewCost will do a lot of the heavy lifting for you. When using this method, you recognize revenue as a percentage of the work your company completed during a period. With the installment method, you only record revenue once you’ve received payment from the client. This means that you recognize income in the accounting period when it’s collected, and not at the time of sale.

• A construction bookkeeper plays a vital role in managing financial data for construction projects.
• While there are many places where you can find a certified accountant, your best option is to browse the American Institute of Certified Public Accountants database.
• Nothing would be worse than losing years of data to a computer crash or natural disaster.
• It involves tracking and analyzing costs, managing project budgets, monitoring cash flow, and ensuring compliance with industry-specific regulations.
• To maintain a positive financial position, you’ll want to use progressive billings (aka progress billings).

The Connection Between Construction Bookkeeping and Project Management

Construction accounting can be a complex and challenging task for independent contractors and construction businesses of all sizes. With unique project-based structures, long-term contracts, and fluctuating costs, the financial management of construction projects requires specialized knowledge and practices. Choosing between the percentage of completion and completed contract methods significantly affects a construction company’s financial reporting and cash flow management. The percentage of completion method offers ongoing insight into project performance and stability, while the completed contract method provides simplicity and potential tax benefits.

Unfortunately, it’s not as simple as agreeing on compensation with a worker and paying them the same rate per project. The high price and length of construction projects make payment scheduling and collection unique. Indirect costs are those which are essential to running https://www.merchantcircle.com/blogs/raheemhanan-deltona-fl/2024/12/How-Construction-Bookkeeping-Services-Can-Streamline-Your-Projects/2874359 your business across projects. Examples include repairs to equipment, insurance, transportation, and software. The more projects your construction company manages and the more workers you contract, the more important it is to have your accounts in order. This sometimes means contractors are able to defer taxable revenue if the contract won’t be completed until the following tax year.

However, note that the FASB updated this principle to clarify how contractors should report information from their customer contracts. Topic 606 is an accounting standard update (ASU) that requires public companies to disclose information related to their revenue recognition practices. This How to Use Construction Bookkeeping Practices to Achieve Business Growth method assumes that a construction company records costs and revenue after they finish the job rather than incrementally throughout the project. Proper expense categorization is crucial for accurate job costing and financial reporting. Develop a clear system for categorizing expenses and train your team to use it consistently.