Construction bookkeeping 101: everything you need to know

When you’re in the construction industry, bookkeeping was probably the least of your concerns. However, construction bookkeeping is an essential skill if you hope to run a profitable organisation and successfully manage your finances.

To help you refine your bookkeeping practices, we’ve created this introductory guide. Below, we’ll outline the key aspects of bookkeeping for construction businesses. We even throw in some proven tips that you can start using right away.

How is bookkeeping different for construction businesses?

Construction bookkeeping is extremely complex. You have to track each individual project, manage income, and account for operational costs. Since no two projects that you undertake are the same, you must have a proven system for monitoring expenses and revenue.

Strong construction bookkeeping practices are also essential when you want to successfully bid on a project. Your bids have to accurately account for all expenses. If you bid too low, then you could potentially lose money on the project.

Key concepts for construction bookkeeping

To optimise your bookkeeping practices, you must first understand the core components of construction accounting. These include:

Project-driven/job-based accounting

Like most contractors, your business is probably based around individual projects. To succeed using this approach, you have to bid rationally and keep costs under control. You must accurately track the cost of each individual job or project. Otherwise, you won’t be able to achieve desired profit margins to sustain your business.

Construction billing processes

There are two primary construction billing processes that you can implement. Many companies will use different billing processes for various projects, so it’s a good idea to be familiar with each style.

The first process is known as fixed-price billing. When you’re using this approach, you quote clients a price based on the estimated total cost for a particular project.

The benefit to this method is that you can provide clients with a clear bid upfront. The downside is that any overages come out of your profits.

The second option is known as unit pricing. When you’re using this method, you bill the client an agreed-upon fixed rate for every unit that you complete. If you estimated the per-unit cost accurately, then you can improve your overall revenue.

Managing varying income, expenses, and other operational costs

Our final key concept involves learning to manage varying income and expenses. Throughout the course of a particular project, you have to ensure that your bookkeeping practices are sound. Otherwise, you can overstretch available resources. This can leave you unprepared in the event that you encounter operational costs due to factors beyond your control.

Bookkeeping tips for construction businesses

Now that we’ve outlined the key concepts of bookkeeping for construction businesses, let’s look at a few ways that you can improve your financial tracking practices.

Outsource your bookkeeping

One of the best ways to help ensure your financial information is precisely tracked is to outsource the job. With Visory, a dedicated team runs your finance function: bookkeeping, payroll, accounts payable and receivable, with Visory’s AI, Delphi, helping under that team’s oversight.

Visory Insights then turns those numbers into a plain-English monthly read, walked through with a Business Performance Partner, so you can see which jobs are making money and where costs are running over.

Read more: Outsourced bookkeeping services

Track invoices and payments when they are received

If you want to achieve long-term success with your construction business, then you have to track all invoices and payments when they are received.

Failing to keep up with all of your invoices can result in outstanding debts that get overlooked. This is one of the fastest ways to ruin your profitability and hinder the growth of your organisation.

Track what you pay out, too. If your business is primarily in building and construction (for example, 50% or more of your business activity or income comes from building and construction services, or did last financial year) and you pay contractors for those services, you must report those payments to the ATO in a taxable payments annual report (TPAR), due by 28 August each year. Recording each contractor’s ABN and payments as you go makes it straightforward.

Use job costing to manage project costs

Job costing is an accounting practice that makes it easier to manage project expenses. When you’re using this method, you’ll accumulate the individual costs of overheads, labour, and materials for a specific project.

Job costing is a great tool to track the specific costs of an individual job. You can also analyse this data to find ways to reduce the expenses of jobs you take on down the road.

While job costing can be used in a variety of industries, it is especially beneficial for construction bookkeeping. When you’re taking on a long-term project, job costing can also help you to identify potential overages. This will give you time to make adjustments to reduce costs or reach out to the client about a billing increase.

Keep project finances separate

At a minimum, keep business and personal money in separate accounts. Within the business, tag every income and expense transaction to its job, using the job, project or tracking features in your accounting software, so you can see each project’s real margin.

Some builders also hold a separate account for large projects, retentions or money set aside for GST and tax. That can help, but it doesn’t replace tagging transactions to jobs, which is what prevents costs landing on the wrong project.

Choose the right revenue recognition method for your business

Revenue recognition is a principle that outlines the best ways to account for your organisation’s earnings. This principle defines the specific conditions under which revenue should be recognised.

For construction contracts, Australian Accounting Standards (AASB 15) usually require revenue to be recognised over time as the work is done, because the customer controls the asset while you build it. This is often called the “percentage of completion” method.

Using this method, you measure how far each contract has progressed at each reporting date, commonly by comparing costs incurred to date with total expected costs. Revenue, expenses and gross profit are then recognised in proportion to the work completed. If a contract is expected to make a loss, the loss should be recognised straight away.

You can measure progress at each month, quarter or financial year end; the more often you do it, the earlier you’ll spot a job that is going over budget. Tax treatment of long-term construction contracts can differ from the accounting treatment, so confirm it with a registered tax agent.

Construction bookkeeping from Visory

While the tips above can certainly help you to improve your construction bookkeeping practices, the entire process remains incredibly complex. That is why you should consider partnering with Visory.

Visory runs bookkeeping, payroll, accounts payable and receivable for growing businesses, including construction businesses. Get your free financial health check to see where your construction business’s numbers stand today.