A Guide to Construction Bookkeeping (for Non-Accountants)
Construction Bookkeeping: An Overview
- How is construction bookkeeping different?
- Finding a construction bookkeeping solution
- Separate personal expenses from business expenses
- Reconcile your bank accounts
- Tracking gross profits by project
- Learn proper accounting for long-term construction contracts
- Start creating financial forecasts
How is Construction Bookkeeping Different?
Bookkeeping for construction companies comes with its challenges and requires a unique approach. One of these is that revenues are earned either by various projects or contracts with a long timespan. These situations can make it difficult to decide when revenues should be recognized.
Often, construction companies have several projects on the go in different areas. Moving people and equipment between sites costs money. Businesses that work in other provinces or even in the U.S. have additional costs to consider, such as tax payments. However, the more projects you have on the go and the more people that work for you, the more you need to have a reliable bookkeeping process.
In addition, tracking each project’s profitability can be tricky, particularly compared to other industries where expenses and revenues are lumped together in a single financial statement. The construction industry is unique in many ways, including the high price of contracts and length of projects. Building projects can take months and even years to finish. Keeping accurate books is central to staying on track and budget.
One of the keys for any business is to keep track of all indirect and direct costs. Direct costs include materials, labour, and rental equipment. Indirect costs are any costs that are vital to your business, such as equipment repair, insurance, transportation, software, etc. It is crucial to track these different expenses to be a successful construction company.
Another challenge is that construction is an outdoor-based industry, which means unexpected variables can impact cost, including weather conditions and regulations that delay project completion. Economic and political decisions can have serious consequences on the construction industry. Factors like the price of equipment, labour and materials can change quickly.
All of these factors make construction bookkeeping an essential element for businesses. With so many moving parts, it is easy for records to be forgotten, lost, or not entered in the books at the right time. Any of these can have long-term ramifications for a construction company.
Finding a Construction Bookkeeping Solution
Construction bookkeeping calls for a unique approach, and there are a few different options for construction businesses. These include:
- Accounting software such as Quickbooks can help you manage your bookkeeping. However, without some background or experience in bookkeeping, it can be challenging to record all the complicated transactions within a construction company.
- Hire a part-time bookkeeper that has experience in the construction industry. While this is a great option for companies who want to keep accurate and up-to-date records for their business, finding the right fit may be difficult.
- Construction companies can also outsource their bookkeeping needs to a firm like Rooks Bookkeeping. Our staff are experienced with construction bookkeeping, understand your needs, and can take your business to the next level.
Regardless of the option you choose for your bookkeeping needs, it is useful to understand the process involved in construction bookkeeping.
Construction Bookkeeping Step-by-Step
Bookkeeping in any industry is a process of sorting through documents and information and recording revenue and expenses. With construction companies, bookkeepers need to follow a precise process to record transactions accurately. Here are the steps involved in construction bookkeeping.
1. Separate your personal and business expenses
It is vital to separate personal expenses from business ones. Often business owners start by paying company costs from their own accounts. Unfortunately, this becomes so commonplace that even once the business is established and successful, expenses are still paid out of a personal bank account.
If you don’t already have a dedicated business bank account, it is time to open one. Construction bookkeeping calls for organized and accurate financials, which will also help save time and money in the long run. There are several other reasons to open up a business bank account, including:
- Organizing your bookkeeping. Having business expenses paid from a personal account can make it challenging to tell the difference between company costs and personal ones. A separate business account allows you to track business expenses, which creates accurate books more easily. It is especially essential when it comes time to catch up on bookkeeping at the end of the month or year. It can also help you avoid wasting time going through piles of statements and receipts when filing taxes.
- Accurate tax returns. Filing taxes can be time-consuming. Having to make your way through piles of documents to differentiate between your personal and business expenses can take days. But, if you have separate business and personal accounts, filing taxes becomes that much easier.
- Clear audit trail. Being audited is no fun. However, the process will go smoother if you have a clear paper trail for your business. Having a separate business account is key to creating an audit trail.
- Cash flow management. Being able to handle the cash flow situation at your business will be easier if you can quickly see in your account that you need to put money into the company account. On the other hand, if your business bank account has an excess amount of cash, it will be easier for you to identify that and invest some of that back in your business.
- Reputation. Leaving a professional impression is vital for any business, but reputation is particularly crucial for those in the construction industry. Having a separate business bank account can make you appear more professional. Trust is easier to build with suppliers and clients when you make and receive payments from a business account.
- Credit rating. A separate business bank account is an important way to build a credit score for your construction company. Having a strong credit rating can unlock borrowing opportunities and better lending terms.
2. Reconciling your bank accounts
While it is not the fanciest bookkeeping responsibility, it is one of the most important. Reconciling your bank accounts protects you from costly errors, mistakes and even fraud. Keeping track of what is happening in your account can prevent you from being overdrawn, and identify any discrepancies in spending.
Reconciling your accounts is a simple task. It involves comparing your bank statements to your bookkeeping records. Each transaction should match up between your books and your statements. It is usually done each month so that you can catch any errors quickly. If you don’t have a bookkeeper, you’ll be responsible for reconciling your bank accounts. However, if you do have a bookkeeper, they will take care of it for you.
3. Tracking your revenues and cost of sales by project
When tracking your transactions, a double-entry bookkeeping system is the best way to ensure your records’ accuracy and reliability. It is the most common way that businesses and bookkeepers use to record revenues and expenses.
Many small business owners begin by tracking transactions through an Excel spreadsheet. Yet, as the business grows, they start to realize that this is not a scalable solution. Construction projects are often based on long term contracts. Therefore, the number of ongoing contracts continues to build and build. One way to solve this problem is to use accounting software like QuickBooks Online because it automates the bookkeeping process.
Construction businesses should track profitability by project. It can be done through a method known as job costing. It is a way to forecast a project’s costs by estimating things such as contractors, materials and supplies, and overhead. Job costing can give companies an idea of what to charge for a project. However, trying to work out estimates by hand can be difficult. It is why it is best to use software suited to job costing for construction projects.
Job costing accurately requires several steps, including:
- List the phases of the project.
- List the tasks needed to be completed in each phase.
- Divide each task into one of three expense categories: labour, materials, and overhead.
4. Learn proper accounting for long-term construction contracts
Another essential step for adequate construction bookkeeping is to understand the three methods of revenue recognition. These are:
- Completed contract - With this approach, revenue is only recorded once the project has been completed. It is best used for short term construction projects.
- Installment - In this bookkeeping method, revenue is recorded only when a client has made a payment. It is best for projects that are paid over time, in installments.
- Percentage of completion - This method records revenue for the project based on what percentage of the project has been finished. Many contractors use this approach for long term projects.
You’ll also need to account for contract retainers, usually 5-10 percent of the contract amount. The money that a client holds until the project has been completed satisfactorily is generally put into an asset account called a Accounts Receivable Retainage or Retainage Dues account.
For example, Suppose your construction company has accepted a small renovation project for $50,000, where 10 percent of the cost is held as a retainer until the project is fully completed. If you were to recognize revenues immediately (assuming it’s a very short-term project, so the methods of revenue recognition aside), the corresponding bookkeeping entry should be:
DR. Accounts Receivables $45,000
DR. Retainage Dues $5,000
CR. Construction Revenues $50,000
5. Start creating financial forecasts
A key element to unlocking business growth is creating a financial forecast. These are predictions about where your company will be in the future based on past performance. They are dependent upon three documents:
- Income statement
- Cash flow statement
- Balance sheet
Financial forecasts are essential if you are looking to borrow money or attract investors. It’s crucial for construction bookkeeping to forecast financials because you’re often dealing with large value contracts and relatively low margins compared to other industries. Any slight deviances can drastically affect the profitability of a project.
It’ll also give you a good idea of what you’ll be making per project, which can free up cash flow and allow you to leverage the cash in new projects, new rentals, etc. And it’ll also help you develop better-priced contracts in the future.
Unlock the keys to your success with financial projections and prepare for the future with cash flow management assistance from Rooks Bookkeeping.