Construction Contractors: Audit and Accounting Guide Publications

how to do construction accounting

Whether talking about billing, production or labor, contractors operate their business primarily around projects. Think of any other business, such as a chain of designer cupcake shops or a pneumatic-valve manufacturer. There, managers might treat each store, plant, product line, or the entire business as a “profit center.” For most industries, these are stable and predictable. An accountant will help you make sense of the numbers, manage your books, generate reports, estimate your quarterly tax payments, maintain a healthy cash flow, and protect narrow profit margins. However, you can take a “completed contract” approach as well, which involves calculating taxes owed on each contract. A benefit of this approach is that you can track income, operating expenses, profit, and taxes on the micro-level so you gain a better understanding of where you stand on each construction project.

how to do construction accounting

Simplify cost management, and be in control of your building projects. Send Invoices, manage contractors, automate processes and keep track of expenses with less sweat. In any project your company manages, it is important to have a construction contract to help keep your company free from unnecessary obligation or risk. There are different ways to account for construction contracts and you want to be sure that you are doing it correctly to protect your business. Cooper Norman is prepared to help you navigate the specifics of construction contracts, and therefore, to help ensure the safety of your business.

Construction accounting basics

Employees (W-2 workers) are usually paid salaries or hourly rates by companies, which pay payroll taxes on their workers’ earnings. Meanwhile, independent contractors are paid hourly or flat rates and are responsible for paying their payroll taxes. Our guide to W-2 vs 1099 workers discusses the differences between classifications in detail. Automating inventory management is the key to increased efficiency and eliminating time-consuming manual tasks. Dawn Killough is a construction writer with over 20 years of experience with construction payments, from the perspectives of subcontractors and general contractors. Dawn has held roles such as a staff accountant, green building advisor, project assistant, and contract administrator.

By managing accounts receivable and accounts payable, software can help contractors ensure they collect what they’re owed and stay on good terms with suppliers. Construction accounting software should also help to ensure accurate tax filings, with enough flexibility to real estate bookkeeping support the range of revenue recognition methods used by the construction industry. Construction accounting software helps automate standard processes like job costing and estimate comparisons and also enables contractors to better track a project’s profitability.

Job cost report

While we are proponents of the SaaS model, we have not seen credible SaaS accounting software for construction business applications yet. We believe that the SaaS model will eventually make its way into construction accounting, but for now that is not the case. While reconciling your accounts, you may also want to review whether you’ve had any unexpected expenses, which will impact a project’s profit forecast by raising the predicted job costing. You’ll want to ensure that this is accounted for and that you have a plan in place so that you don’t lose profitability and compromise your profit margin. Construction accounting software can perform complex functions that help you with tax compliance, keep track of revenues and expenses on each job site. Itemized receipts automatically, perform payroll duties, and much more.

  • So, in addition to core accounting, they require service dispatch, scheduling, service contract management and spare parts inventory management.
  • Labor costs have the ability to impact schedules, project timelines, budgets and, ultimately, the total profitability of your contract.
  • This means that you have to consider mobilization costs such as travel time, insurance, and other related expenses for each job.
  • Foundation is a construction accounting software that allows businesses to track financial statements and manage job costing operations.

The percentage of completion method involves the ongoing recognition of revenue and income related to longer-term projects. By doing so, the company can recognize some gain or loss related to a project in every accounting period in which the project continues to be active. For example, if a project is 20% complete, the company can recognize 20% of the expected revenue, expense, and profit. The method works best when it is reasonably possible to estimate the stages of project completion on an ongoing basis, or at least to estimate the remaining costs to complete a project.

Construction Accounting Basics for Every Contractor

It’s also difficult to define the scope of labor on the project when total units have not been specified. 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).

The company must also ensure it complies with local wage scales and regulations in effect at each site, and it may need to purchase materials or rent machinery from outlets near each site. Many contractors choose to lease rather than purchase vehicles, and lease accounting brings its own challenges. In essence, the percentage of completion method allows you to recognize as income that percentage of total income that matches the percentage of completion of a project.

Do I Have to Sign a Lien Waiver to Get Paid?

Revenue recognition or income recognition is how a contractor determines when they’ve officially made money on a project. It also helps determine when they should officially record an expense. Remember, this comes into play because construction contracts are usually long-term and often have delayed payments. Contractors aren’t necessarily able to complete, bill and collect on a contract in the same month. Construction accounting is a unique form of bookkeeping and financial management.