How to Do Accounting for Your Construction Business 8 Steps

Once you complete the project, you can then issue a final invoice for the entire value of the retainage. As we mentioned earlier, contract retainage can account for 5 to 10 percent of your contract value. Note down all the information from your receipts and invoices in case you ever need it. Apart from giving you insight into where your money is going, receipts also serve as proof of your business expenses in case you ever get audited. Here are ten tips that can help to simplify and improve the way you handle construction bookkeeping.

Construction vs General Accounting

It is essential to check all costs regularly and ensure they are included in the overhead calculation. Overheads may consist of office expenses, insurance, maintenance, and training. Contractors typically assign overhead costs to a project as a percentage of the total project cost.

Invest in construction accounting software

You might have ripped it up and thrown it in the trash, but it’s still in your accounting software as a duplicate cost. This is why a good data validation, or reconciliation process, is so important. Without a monthly reconciliations system, you have no idea which transactions are real, and which aren’t. Another big difference between normal bookkeeping and construction bookkeeping is the amount of large customer deposits you’re going to see on your P&L, especially when you’re starting a new project. It might look like you’ve had an incredibly profitable month because you’ve invoiced your client to get a project started, but that’s not the full picture. When you recognize that this is a deposit and not income, your overall profitability for the month looks a lot different.

• In order to calculate how much of the contract they’ve earned for a billing period, they might choose among a number of methods, including cost-to-cost and estimated percent complete.
• Understanding and regularly monitoring these three “gauges” will help you make informed decisions and steer your business in the right direction.
• Jason Ding is a seasoned accountant with over 15 years of progressive experience in senior finance and accounting across multiple industries.
• To help you better identify what kind of accounting software will help you simplify your financial efforts and streamline your business processes, we’ve prepared a handy comparison list.

Various direct and indirect costs in construction accounting

From this list (or chart) of accounts, you can generate financial statements (e.g., income statements and balance sheets). Financial statements are https://www.bignewsnetwork.com/news/274923587/how-to-use-construction-bookkeeping-practices-to-achieve-business-growth a wealth of information about your business performance and financial position. Analyze project costs periodically to identify trends, inefficiencies, or unexpected expenses. Use this data to refine your construction cost analysis processes and improve future budgeting.

Bill.com is widely used for automating AP tasks, offering ease of use and integration capabilities that are helpful for construction companies managing project-based expenses. It’s hard to protect your margins on the job without being able to see how it’s performing in real-time. WIP reports make it easier to construction bookkeeping get an overview of each project’s budget, percent complete, actual costs to date, and more, so you can see if it’s overbilled or underbilled. Having this kind of system for every construction contract you take on is essential. Once in place, it will not only help you ensure your original estimate was correct but confirm you’ve accurately captured the scope of the project based on what you’ve bid.

• The Complete plan builds on the first two plans by centralizing complex processes and allowing businesses to have complete control of projects from beginning to end.
• Equipment and labor costs also mean each site must have a distinguished wage rate.
• The percentage of completion method (PCM) allows a contractor to recognize revenue as they earn it over time.
• So for example, if you have $200,000 in overhead expenses for the previous year and $1,000,000 in direct job costs (COGs) you would have 20% overhead using the direct job cost method.
• For contractors, cost of goods sold (COGS) provides a vital glimpse into the profitability of a project over a specific period of time.

That’s because it delivers a deep feature set to support complex workflows with time and billing management, detailed job costing, and financial reporting. PENTA also handles construction accounting, including automated closing features and foreign exchange capabilities. As an all-in-one accounting and project management solution, there’s no need for you to use multiple software solutions to manage the various aspects of your construction business. Choosing between the percentage of completion and completed contract methods significantly affects a construction company’s financial reporting and cash flow management. The percentage of completion method offers ongoing insight into project performance and stability, while the completed contract method provides simplicity and potential tax benefits. Understanding these methods is essential for effective financial planning and operational success in the construction industry.