Construction Accounting: Full Guide for Contractors 2024

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. Understanding these methods is essential for effective financial planning and operational success in the construction industry. Construction accounting software helps companies manage budgets and cash flow to help support a financially healthy business. It can easily create and send invoices to customers based on invoicing processes and billing methods you’ve established. From there, the invoices are automatically tracked in the system against the contract price, factoring for the true costs of a job.

How Do You Handle Financial Management in Construction Projects?

Therefore, it is essential for construction companies to keep accurate records of all financial transactions and to file their taxes on time. Financial statements are a summary of a company’s financial transactions and include the balance sheet, income statement, and cash flow statement. The balance sheet shows the company’s assets, liabilities, and equity at a specific point in time. The income statement shows the company’s revenue and expenses over a period of time, and the cash flow statement shows the inflows and outflows of cash during that period. In addition to payroll, construction companies must also manage a wide range of expenses. This includes everything from materials and equipment to subcontractor payments and travel expenses.

Manage your construction bookkeeping effectively

The construction industry is highly susceptible to political and economic fluctuations that disrupt the supply chain. Things can happen beyond your control to destabilize your cash flow, such as bad weather conditions or a piece of equipment breaking down. This guide to construction bookkeeping will give you the best practices when managing your books and performing accounting tasks.

• Choosing the perfect construction bookkeeping software, such as QuickBooks and Xero, involves considering key factors.
• While many construction firm owners attempt to manage their own books, outsourcing bookkeeping to a professional team like NorthStar Bookkeeping offers many advantages.
• Accurate bookkeeping ensures compliance with these regulations, including recording and reporting income, expenses, and other financial transactions in accordance with tax laws.
• Job costing is a process that helps you determine the costs of working on a project.
• A construction payroll service that can handle multiple states, unions, and certified payrolls can save a tremendous amount of time.
• Choosing the right accounting software is essential to meet the complex demands of construction.

Certified Payroll & Prevailing Wage

• To effectively keep track of your project’s finances despite the method you choose, make sure you’re following these key principles.
• Nothing in construction can make or break your company’s profitability quite like change orders can.
• Most systems require confusing workarounds with third-party integrations just to be able to use them.
• This helps you identify potential issues or delays early on and adjust your plans accordingly before they become bigger problems that could impact the project’s outcome.
• Contractors aren’t necessarily able to complete, bill, and collect on a contract in the same month.

It tracks these not only to each job but also within each group of job activities and each type of cost. For example, a contractor might “code” an invoice to Job 140 (Lake Ave. Remodel), Cost Code 100 (Foundation), Cost Class “MAT” (Materials). Some might also categorize costs by project phases or sub-jobs, like floors of a structure or buildings in a development. The system of categories the contractor uses across all of their jobs is called the job cost structure.

As we construction bookkeeping services mentioned earlier, contract retainage can account for 5 to 10 percent of your contract value. This helps you get a better idea of how much money is coming in and going out of your business every month. Apart from giving you insight into where your money is going, receipts also serve as proof of your business expenses in case you ever get audited. In most industries, commissioned contractors get paid upon delivery of a product or service. Janet Berry-Johnson, CPA, is a freelance writer with over a decade of experience working on both the tax and audit sides of an accounting firm. She’s passionate about helping people make sense of complicated tax and accounting topics.

How Can Bookkeeping Software Improve Your Accounting Process?

If you don’t intend to hire a professional, follow these best practices for construction bookkeeping to keep your financial records updated. The ASC 606 applies to construction companies because of the nature of their revenue. There are other aspects of construction accounting that make it unique from general accounting, as well. Each business needs to have a general ledger and records of accounts payable and receivable. General accounting requires people to use Generally Accepted Accounting Principles (GAAP), as does construction accounting. As the leading provider of construction budgeting software, Buildertrend is committed to helping you stay on top of your bottom line.

An accountant in construction typically ensures that the organization’s financial statements, taxes, and other documents are accurate and up-to-date. They might also work to develop budgets, provide cost analysis for current and future projects, and create and manage accounts payable and receivable. This method allows contractors to accurately bill their clients for the work they have completed rather than charging them a lump sum fee.