How to Do Bookkeeping for Construction Companies

Time and Materials (T&M) billing is commonly used when the project scope https://azbigmedia.com/real-estate/commercial-real-estate/construction/how-to-leverage-construction-bookkeeping-to-streamline-financial-control/ is not well-defined at the outset, or when changes to the scope are expected. Under this method, clients are billed for actual labor hours worked and materials used, plus a markup for overhead and profit. With the steps in this guide, you have everything you need to do construction accounting for your company the right way.

Categorizing Expenses

The best way to stay organized construction bookkeeping is tracking your day-to-day transactions, reconcile your accounts on a regular basis, and use construction accounting software. Your company may manage short- and long-term contracts, often with varying end dates. To stay on top of cash flow and keep your books in check, you will need a flexible yet organized construction accounting system. Consequently, understanding the percentage of completion method becomes critical.

Accounts Payable Aging Report

• Before choosing a bookkeeping software, ask if they offer a free trial and use that time to get familiar with the way it works.
• These projects can range from building residential properties to large-scale infrastructure developments.
• This method is often used for short-term or small-scale projects where it is difficult to estimate completion percentages accurately.
• Contractors and real estate developers use GAAP construction accounting to  increase their financial accountability and provide valuable peace of mind to customers.
• It summarizes project costs, income, and the difference between the two, providing valuable insights for each project.
• This accounting method is praised because it gives a more accurate picture of how long-term projects are doing.

You can go to a bank or credit union to set up a company checking account that suits the needs of your firm. The first step for all construction firms is to open a separate business bank account that will be used exclusively for your business. Whichever method you choose, have the systems and processes set up to produce the required data.

What to expect from a construction bookkeeping partnership

They’re only required to use the percentage of completion method for construction contracts that extend over two years. Job costing is essentially charting out a project’s financial roadmap — a comprehensive exercise that tabulates the entire cost landscape of a project. As such, accurate job costing involves a categorical allocation of costs, distinguishing between direct expenses like labor and materials and indirect overheads. The insights gleaned from job costing empower contractors to maintain budgetary constraints, gauge project profitability, and anticipate potential financial challenges. This allows them to accurately estimate job cost and compare it to the actual cost, helping them determine profitability. Together, these two systems give a construction company a holistic view of its finances.

Why Are Accounting Principles Important in Construction?

Without good bookkeeping, you risk going over budget on projects and not having the cash flow to cover your expenses. 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.

Track Every Expense:

Cash basis accounting records income and expenses as soon as cash is received or paid. While simple to implement, this method may not provide an accurate picture of a project’s financial performance, particularly for long-term projects with multiple payment milestones. Under regular business accounting circumstances, revenue recognition is simple because they sell a product or service and collect a fixed price right away. However, the nature of construction companies makes how these businesses recognize revenue more complicated. Plus, they tend to have unstable materials costs, varying wage rates and workforces, and changes based on a project’s location.

• Construction companies have unique accounting needs that require specialized bookkeeping practices.
• Our detailed brochure provides insights into how Remote Books Online can help you maintain accurate bookkeeping, stay tax-ready, and make informed financial decisions.
• For an employee working in multiple states, unemployment is often owed only to one state per employee.
• Championing transparency and consistency, it involves a standardized five-step model for revenue recognition, ranging from contract identification to revenue recognition per performance obligation.
• A construction business with gross receipts under $10 million can use the completed contract method on construction projects that last less than two years.

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On the construction side of things, the individuals doing this type of work include construction bookkeepers or construction accountants — or, more generally, bookkeeping professionals. However, not all specialize in construction accounting — but rather standard or regular accounting. In contrast, construction companies face a different and much more complicated series of challenges. You’ll also want to categorize these expenses by service, and by individual job so you can easily track how much money came in as well as how much you spent on expenses. Using an expense tracker and saving your receipts can help you keep track of all of your expenses and project profits on each job.

What Software Can Help You?

Implement our API within your platform to provide your clients with accounting services. In any case, we recommend hiring a bookkeeping accountant with experience and expertise to handle the critical aspect of doing taxes. Finally, partners or owners of construction firms need to consider the tax implications of their business structures. For better clarity, here are all the billing methods with short explanations of how they work in everyday operations. With unit-price billing the contractor doesn’t charge the customer for the total amount at once.

Why Is It Important to Separate Business and Personal Finances?

Our detailed brochure provides insights into how Remote Books Online can help you maintain accurate bookkeeping, stay tax-ready, and make informed financial decisions. Discover how our tailored bookkeeping services can support your business growth and simplify your financial management. You can record daily transactions anywhere — on a spreadsheet, on paper, or in an accounting software program. Some examples of daily transactions include paying equipment rental, employee wages, or subcontractors specialized in specific areas of construction.