23 May Construction Accounting 101: A Simple Guide for Contractors

Billing a fixed-price contract often happens on a percentage-of-completion basis with retainage withheld. Factoring for some of the essential differences from general accounting, construction accounting relies on several important concepts. Contractors need precise tracking and reporting, as well as collection and cash-flow strategies to maintain long-term success. Gain real-time insights into all project expenses within your accounting system, enabling better financial control. The construction industry balance sheet reflects–assets, liabilities, advances, equipment charges, project financing, and retentions.

Government Contracts

To ensure you aren’t surprised by a customer withholding part of the fee you’re owed, make sure you account for contract retainage properly when budgeting The Significance of Construction Bookkeeping for Streamlining Projects for a project and invoicing clients. You should also add your income and expenses from each project into a general ledger to get an accurate overview of your gross and net income. Whether you decide to do job costing manually or using software, the same steps apply.

Unit Price Contracts

Construction accounting is an important part of any construction business because it helps ensure that the company has solid financial reporting. By understanding these practices, owners can better monitor the financial health of their projects, identify cost overruns, make strategic decisions, and control costs. Construction accounting software should help businesses maintain compliance with tax laws, labor regulations, safety standards, and financial reporting requirements. By automating compliance-related tasks and keeping accurate records, the software can help minimize the risk of legal issues and penalties. Construction accounting software should offer comprehensive reporting tools that provide accurate insights into financial health, project performance, and operational efficiency. This enables businesses to build trust when analyzing profit fade, cash flow, trends, provide better estimates, and make data-driven decisions that drive growth and profitability.

Percentage of Completion Method

• 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.
• Retainage is a common practice in the construction industry where a percentage of the contract amount is withheld until the project is completed.
• This poses a challenge for construction bookkeeping professionals, as they need to be able to gather the necessary information from multiple sites and sources and be confident the information is accurate and complete.
• In the U.S., businesses that make under $25 million annually can choose to use the cash basis method or the accrual method.
• As is often the case in construction, workers have to switch between job sites in multiple states and cities.
• You also need to keep track of expenses at the time of payment to reduce your tax bills this year by buying additional consumables towards the end of the year.

Alternatively, you can take advantage of a dedicated bookkeeping software solution to manage your bookkeeping https://www.inkl.com/news/the-significance-of-construction-bookkeeping-for-streamlining-projects more easily. Any bookkeeping solution you choose should have these core features at a minimum. If your business has any unique bookkeeping needs, you’ll want to look for a solution that caters to those needs as well. You can avoid this by backing up all your records using services such as Backblaze or IDrive. Losing your bookkeeping records due to a natural disaster, a computer virus, or hardware failure can be devastating.

Leverage Professional Construction Accounting Software

One of the most important steps in construction accounting is keeping personal and business finances separate. Opening a dedicated business account helps avoid confusion, makes tax reporting easier, and ensures that you have accurate financial records for your business. This separation also simplifies the tracking of income and expenses, making construction bookkeeping more organized and manageable.

• Every project is affected by different site conditions and regional variables such as workforce, material costs, and laws.
• Understanding how to handle these job costs and their proper allocations is key in construction accounting, while this type of analysis will not be needed in other industries.
• It’s essential that contractors have an effective method for keeping track of income and expenses, and for reconciling every transaction.
• You can choose from a variety of methods, such as cost-to-cost and estimated completion rate, to calculate the amount you earned from your billing contract.
• Due to the unique complexity of each project, it can be challenging to evaluate and get your bids on track in a competitive yet profitable way.

This is because there’s a diverse workforce present on a site, with individuals from various localities filling various job roles. Larger businesses and those who maintain inventory must use an accrual basis of accounting to comply with U.S GAAP (Generally Accepted Accounting Principles). For those operating in the construction industry, whether just starting out or as an established small or medium-sized business, managing business accounts often takes a back seat. An experienced construction accountant knows to anticipate and then manage what’s required. They’re clear on the two strands of project and business accounting, and they’re used to working with an industry where the plans are altered on a daily basis.