Construction Bookkeeping is a unique form of accounting and financial management. It intends to help contractors track each job and how it influences the company as a whole. Costs from labor, employees, transportation, equipment, materials, and insurance must all be tied together to complete the bid process. An effective bookkeeping system allows for more accurate practices which can ultimately maximize company profits. Even though it follows the same principles of general accounting, it has multiple distinctions that are crucial to run a successful construction company.
—Bookkeeping variables that differ construction bookkeeping from other companies
—Construction accounting concepts that every construction bookkeeper should know
—Bookkeeping software for organizational purposes
—Tips to make bookkeeping as simple as possible
Why is Construction Bookkeeping different?
Construction contracting has several distinct factors that differ from other industries, like manufacturing or retail. Below are the variables.
Contractors operate their business primarily around projects with billing, production, or labor. Depending on the job, the financial focus changes. Company’s profit margins determine the contractors’ livelihood; so it’s essential to stay organized with bookkeeping. Most importantly, construction companies have to control costs and bid rationally, and that is to track accurate costs for individual projects and job costs.
Production happens on various job sites rather than set locations unline retail and manufacturing. Equipment use and labor frequently move, which results in mobilization costs. Additionally, equipment and labor costs always have to be tracked to each job site with the varying wage rates.
Construction also works on long and seasonal production cycles. Production can be less predictable, and contractors often aren’t able to retain inventory in large amounts — resulting in the fluctuation of availability and cost of production inputs that require attentive tracking and planning.
Construction contracts can often take years, which is longer than many other businesses. Depending on the contract terms, they commonly allow 30 – 90 days or more to pay invoices. Retainage withholding can lag payment for more extended periods. Because of this, it is necessary for contractors to track and report costs precisely as well as having funds available for shorter-pay periods.
Important Concepts for Construction Bookkeeping
1. Job Costs
Job costing is useful for project managers and supervisors because it measures how to improve estimates and budgeting from several different aspects of a project. Job costing is made up of individual projects, cost types, and cost activities. Cash flow analysis and accurate gross profit are benefits to accurate job cost accounting. For example, cash flow analysis during the project ensures you won’t run out of funds before the project is over and accurate gross profit margin is beneficial because project managers need to know it in order to cover all overhead expenses.
2. Construction Billing
Construction production is product-based, decentralized, and long-term. Many industries operate using billing processes like fixed-price and point-of-sale billing. However, since construction companies use a number of billing methods, specialized software might be required to track those billings.
Fixed price is based on a detailed estimate that presents the total cost for the entire project, from start to finish. Billing a fixed-price process often happens on a percentage-of-completion basis with retainage withheld. The risk is that if there are any overruns because of changed site conditions or input costs, and this falls on the contractor
A foreman or contractor will bill a customer at a fixed price-per-unit rate. It is common to use this billing method, especially when companies aren’t able to estimate the unit production for the project with certainty. Contractors may increase their revenue if they’ve estimated the unit pricing correctly. But since production quantities can end up higher than expected, there can be a risk between customer and company.
AIA Progress Billing
AIA contract stands for the American Institute of Architects contract. An AIA is a document that contains the completed contract billing throughout the entirety of the project. Many construction companies suggest a close review of an AIA billing contract to ensure that all parties involved are receiving equal advantages.
Construction Accounting and Bookkeeping Software
We live in a technologically advanced world. Doing your bookkeeping by hand can inevitably turn into a disaster. Construction accounting software will help keep your team organized because it records financial transactions in one centralized location. For example, the software can keep track of project expenses, invoices, cost-plus hours, etc. Depending on the project, many accounting software on the market are specified, and general accounting software may be applicable. However, as a construction company grows, it might be a good time to consider exploring software developed for the construction industry because transactions become more complex. Some software allows for cloud-based storage which allows data entry from any location.
Here are a few bookkeeping tips that will improve the organization of your bookkeeping to keep it as simple as possible.
1. Create a series of journals to record the daily transactions of the company
In our technologically advanced world, we can use software to record accounts payables, accounts receivables, job costs, and materials. Make sure to record and enter company bills in the “accounts payable” journal with the date and to whom the payment was made. These include:
–Repairs and maintenance for machinery
2. Track Payments
Construction jobs are invoiced periodically and it is vital to track the invoices when they are sent and received throughout the job. Especially since in the construction industry, there are multiple projects going on at once, it is important to track invoices so nothing gets lost.
4. Keep backups of your records
Bookkeepers should keep all invoices and receipts just in case. If one chooses to keep hard copies of these, a safe and organized place to put them would be in a filing cabinet. It would be best to keep a digital copy just in case a hard copy gets damaged or lost. Having a digital copy on a Cloud-based technology allows for nearly unlimited storage and access to information from almost anywhere.
Construction bookkeeping is different than a normal industry’s accounting process. Construction projects have scattered production, extended periods, and various locations that need an organized bookkeeping system. Bookkeeping in the construction industry is essential to complete a bid by tieing all costs together. Predicting a construction profit margin is difficult, but using software for bookkeeping is a good idea to stay organized because a small mistake can inevitably turn into a disaster. Lastly, once you have the right accounting software for the office, you will need a field-first operational platform for your jobsite team to easily collect and pass real-time data into your accounting program. Ready to get started?