Bookkeeping for construction companies requires specialised industry knowledge, in addition to technical skills. Construction accounting professionals have to understand the income and expenses of each project and how this data impacts the business as a whole.
In this article, we’ll show you why proper bookkeeping is essential for those in the construction industry, while also highlighting some of the best practices for those who are tasked with running a construction business.
Why Is Bookkeeping Important for Construction Businesses?
Construction companies have different accounting needs than other small businesses in retail or manufacturing. Construction projects typically involve multiple moving parts, such as:
- Rental equipment
- Overtime pay
As most project managers can affirm, most construction projects come with additional, unexpected job costs that seem to crop up before the job is complete.
But bookkeeping for construction companies is more than just a matter of managing the overhead costs associated with each project. Construction bookkeepers also have to manage construction contracts, some of which can take years to complete and may require multiple phases.
Maintaining cash flow is essential for your company’s revenue, but also for securing the resources that are necessary to complete each contract.
Construction Bookkeeping Tips
How do you keep the books for a small construction business? Below, we’ll share some of the best practices for bookkeeping for construction companies.
Keep Track of Payments and Invoices
One of the most important strategies you can employ is to document everything. Every transaction should be recorded. When possible, you should retain copies of receipts for purchased materials, along with all invoices sent to clients. That way, your business can be protected in the event of an audit and you’ll have a clear record of your income and expenses.
How do you record these transactions? Every transaction should be recorded in one of three categories:
- Accounts payable (bills and expenses)
- Accounts receivable (money collected from clients)
- Job costs (overhead costs such as labor and supplies)
Keeping these records up-to-date ensures that you have a clear, accurate picture of your construction company’s overall financial health, and it may even help you develop a strategy for future contracts.
Having a clear record of your cash flow can also be important if your business ever requires a small business loan. Lenders may evaluate your books to determine your eligibility. Your records may influence the amount of money you can borrow.
Use Job Costing to Manage Project Costs
What is job costing? Job costing is basically a way to estimate the cost of a particular construction project. You’ll have to account for labor, materials, and other overhead costs. These figures can help you determine what to charge for the project as a whole.
Larger projects will have to be broken down into distinct phases. Each phase should then be broken down into a series of smaller tasks. Finally, you can estimate the cost of each task based on the following categories:
- Labor (account for taxes, overtime, and any insurance)
- Materials (concrete, steel, nails, screws)
- Overhead (rent, utilities, travel costs, salaries)
Don’t make your estimates too tight. You’ll want to leave some room to account for loss due to damaged materials, as well as fluctuating costs for supplies and delivery.
Your individual project costs can then be factored into your general ledger, helping you see how the revenue generated from each project influences the success of your business as a whole.
You’ll also want to account for any additional overhead, such as marketing or administrative fees associated with your business.
Use Multiple Bank Accounts to Keep Finances Organized
Some business owners may find it confusing to keep their money in separate bank accounts. But using multiple accounts can make it easier to perform bookkeeping for construction businesses.
Keeping your money in one account can actually become more confusing, since it will be harder to keep track of the money devoted to income, expenses, overhead costs, and other categories.
Instead, divide your construction company’s finances into different accounts. For example, you might consider dividing your money as follows:
- One account for paying expenses
- One account for payroll
- One account for receiving payments
You could theoretically further divide your expenses into separate categories for supplies and overhead, though a three-part system keeps things simple and manageable. It will also make it easier to compare income and expenses, since the balance from these accounts will provide a quick glimpse into your net cash flow.
Use Milestone Payments to Improve Cash Flow
Earlier, we hinted that construction projects are often completed in phases, which is why bookkeeping for construction companies works a bit differently than other industries.
But using milestone payments can improve cash flow prior to a completed contract, all while ensuring that you maintain a revenue stream to pay employees and cover the cost of materials.
Milestone payments are the payments you charge after the completion of each phase of the construction project. Obviously, this requires clear communication with the client beforehand, but having your customers make incremental payments can keep your revenue flowing and your projects moving on schedule.
In fact, some clients may appreciate the ability to make milestone payments, as it introduces a layer of accountability into the relationship. Your customers may appreciate the chance to monitor the progress made on their construction job and feel a greater sense of satisfaction as they get to oversee each phase of the project.
Choose the Best Revenue Recognition Method for Your Business
There are three revenue recognition methods you can use for bookkeeping for construction businesses.
The completed contract method records revenue once the project is complete. This can be useful for short-term projects, but it can also be used to defer any related income tax.
The instalment method is usually preferred when your clients make payments over time. You’ll record revenue as you receive these payments, which means you’ll acknowledge revenue during the period in which it’s collected rather than the time of sale.
The percentage of completion method works best for long-term projects. You’ll record revenue as a percentage of the project that’s been completed during each reporting period, which can better help you understand your gains and losses.
Outsource Your Bookkeeping
Many online firms specialize in bookkeeping for construction businesses. When you partner with an online bookkeeping firm, you’ll save yourself the time and hassle of handling your own books. This allows you to spend less time on administrative details and more time managing your projects and workers.
This also helps most business owners to save money. Compared to the costs of an in-house bookkeeper or accountant, online bookkeeping services are surprisingly affordable. Best of all, they can provide expert-level guidance without the need to commit to a full-time employee.
Outsourcing your bookkeeping needs gives you access to some of the best accounting software in the industry. The advanced reporting features associated with these agencies can provide a comprehensive view of your company, helping you make better decisions for your future.
This can be particularly important when it comes to preparing and paying your taxes. Online bookkeepers can manage your funds to ensure that you stay compliant with tax codes and can adequately prepare to pay your annual income taxes.
Constructing Your Future One Spreadsheet at a Time
The professional team at Visory has extensive experience in bookkeeping for construction businesses, and we can help you better manage your company and all its projects. Want to learn more? Explore our website to learn more about Visory’s bookkeeping for professional businesses, or sign up today to get started.