How to Do Accounting for Your Construction Business 8 Steps

how to run the accounting in a construction business

Properly prepared and analyzed, the WIP report can provide more insight into a construction company’s financial performance than the balance sheet or income statement. Monitoring this information on a continual basis allows you to identify and address weaknesses in project management, estimating and administrative practices before they do lasting damage. Construction accounting software helps automate standard processes like job costing and estimate comparisons and also enables contractors to better track a project’s profitability. It’s a full accounting software package, with a job costing capability that allows you to generate cost reports and check job cost journals, labor journals, and billing summaries. So, contractors face a variety of construction accounting requirements, and the first on G2’s list is job costing.

how to run the accounting in a construction business

By tagging every transaction with information from the job cost structure, contractors are able to see a whole new dimension to their costs. They can look at how much each aspect of operations costs on a particular job and across the company as a whole. Along with expenses, they can track progress according to specific budget items, detect patterns, and report profitability or overruns for different production activities as they’re underway. Importantly, they can also identify costs shared between multiple jobs, like equipment, and calculate a fair way to distribute those costs, which is called overhead allocation.

construction accounting

The percentage completion vs completed contact is often used by construction companies because they typically work on long-term large projects in which income and expenses are often deferred. Accordingly, both percentages of completion and completed contract methods allow for such tax deferral. This article will help you decide which method is best suited for your construction projects and simplify your construction accounting processes.

Know when critical materials are out of stock and plan your purchases accordingly. The IRS continues to scrutinize the “tax gap” — the amount between taxes that are voluntarily paid and the amount the tax agency believes is actually due. Large firms tend to have multiple corporate entities and need to consolidate their financials. They also tend to have different units performing different types of work (e.g. GC, MEP, Civil—all under one parent firm). Generally, these firms are seeking to modernize by replacing aging legacy systems. Tell us more about your business and an advisor will reach out with a list of software recommendations customized for your specific needs.

Do Bookkeeping the Right Way With a Bookkeeping Checklist

In the end, the goal is to help contractors identify their true costs and profitability, which is otherwise very difficult to do in an industry with so many variables from contract to contract. Then, they can use these to inform their estimating, budgeting and decision-making going forward. Similarly, in contrast to retail and manufacturing, production construction bookkeeping primarily happens on different job sites rather than fixed locations like plants. It also means that equipment and labor costs always have to be tracked to each job site with the correct wage rate. It’s important to set up the right accounting structure to ensure each company’s investment, revenue and profit is accurately reported.

As a type of progress billing, AIA billing invoices the customer based on the percentage of work completed for that billing period. This invoice generally consists of a signed summary sheet, followed by a schedule of values that details what’s been completed and billed to date. According to revenue standards, the contractor doesn’t have a current, unconditional right to the retainage portion of an invoice.

Six ways to get your invoices paid on time

Vendors continue to expand the breadth of their system through development and acquisition. Buyers should weight integrated suites versus best-of-breed applications. Contractors need to track detailed costs by job and manage complex payrolls, among other things. In response to these requirements, roughly 100 applications vendors exist to serve the market.

Without properly authorized change orders, in some cases it may not be possible to recognize additional revenue in the same accounting period in which you incur costs to perform the additional work. This situation can have a negative impact on your financial statements and their evaluation by your banker and surety. But good construction accounting systems and practices are powerful tools for managing your business.

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