In this fast-paced and dynamic field, accurate and efficient bookkeeping is vital to ensure financial stability, optimize project costs, and make well-informed decisions. 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 How to Use Construction Bookkeeping Practices to Achieve Business Growth 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. Retainage is a common practice in the construction industry where a percentage of the contract amount is withheld until the project is completed.

Maintaining a Separate Business Account

With these important considerations out of the way, let’s look at how it all seeps into construction billing. On this difficult path, construction accountants need all the help they can get. Set limits, turn tracked time into automated timesheets, and send invoices with Hubstaff. The advantage of intuitive software is that you don’t need to spend time learning how to use it and can take advantage of all its features straight away. Opting for a solution that requires extensive training before you can use it is not only going to cost you time but also risk frustrating both you and your employees. Some solutions, like Hubstaff, offer a free trial to provide you with an opportunity to test the software and determine if it’s the right fit for your needs.

How construction billing works

Without good bookkeeping, you risk going over budget on projects and not having the cash flow to cover your expenses. Without consistent financial reports, it’s challenging to understand project profitability and make https://www.merchantcircle.com/blogs/raheemhanan-deltona-fl/2024/12/How-Construction-Bookkeeping-Services-Can-Streamline-Your-Projects/2874359 informed decisions. Manual reporting methods are time-consuming and prone to errors, resulting in inaccurate data.

Billing method #1: Fixed-price billing

Subtracting COGS from total revenue is the surest way to determine your gross profit margin. Gross profit and gross profit margin is a tremendously useful tool that will allow you to measure the efficiency of your jobs, operations, and sales/bidding process. This formula will reveal your “book value” or the value returned to all shareholders after paying debts and liquidating assets. In other words, it’s a measure of ownership in a company or asset after considering all outstanding debts.

Plus, automation eliminates the risk of human error when tracking expenses and revenue and makes it easier for you to share your information. If you don’t have a highly accurate and efficient construction bookkeeping system, the rest of your business will suffer. As a reminder, accrual accounting recognizes transactions when they are earned or promised, regardless of when money actually switches hands. With this structure, the chart of accounts will help you organize every transaction by type or category, such as assets, liabilities, income, and expenditures. To simplify this, the balance sheet is your high-level view of finances from year to year.

Best Practices for Construction Companies to Prepare for a GL Insurance Premium Audit

• Many construction companies use the percentage-of-completion method for long-term projects, as it provides a more accurate picture of financial performance over time.
• These costs are typically spread across all projects or allocated proportionally based on certain metrics such as revenue or labor hours.
• In any case, we recommend hiring a bookkeeping accountant with experience and expertise to handle the critical aspect of doing taxes.
• A tax professional can help construction companies identify tax deductions and credits that they may be eligible for, which can help reduce their tax liability.
• Meet a Knowify expert, get your questions answered, and start your journey today toward organized, profitable projects with Knowify.

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. As a side effect, contract retainage incentivizes contractors and subcontractors to finish their job timely and in line with the contract. The act of withholding payment is called contract retainage and is part of a contract signed by the contractor and customer before the project’s implementation. In other words, they know they can get paid as soon as they achieve a milestone.

• Yet, as the business grows, they start to realize that this is not a scalable solution.
• In many cases, you need to have your financial records for at least three to seven years (varying by state and type of record) so losing them would cause a lot of problems.
• By addressing these challenges proactively, construction companies can streamline their bookkeeping processes and focus more on delivering successful projects.
• Underneath the balance sheet falls the income statement which depicts a specific period of time–the month of May, for example.
• By keeping accurate records and using the right tools, construction companies can effectively manage their expenses and maintain a healthy bottom line.
• One of the most important aspects of bookkeeping for construction companies is handling payroll.
• The problem is, construction accounting is entirely different from accounting in other industries.

In this case, a construction accountant’s job would be to oversee how, when, and where money is spent, among other things. Maintain financial records like invoices, receipts, bank statements, etc., for the period mandated by tax regulations, usually 5-7 years. Store them systematically, physically or online, in folders by financial year. Train staff to use it correctly for maintaining transparent and accurate records online or on mobile apps. If you decide to hire an accountant, look for one with experience in your industry because they’ll know how to handle your company’s accounting needs most effectively.

• A well-structured cost coding system is a key construction accounting process and crucial for effective job costing and financial management.
• Construction contractors, however, need to treat each construction project as a unique, short-term profit center because each construction project tends to have unique inputs and requirements.
• This process is critical for ensuring that every expense—whether it’s for labor, materials, equipment, or subcontractors—is accurately recorded and attributed to the correct job.
• In these cases, there’s a risk that you won’t collect the full payment, so it’s wise to wait until you actually receive the payment to recognize it as income.

That leaves contractors and construction accountants with a choice of revenue recognition method. Forming solid construction accounting processes is absolutely critical if you want to grow your contracting business. The problem is, construction accounting is entirely different from accounting in other industries. If you want to succeed, you can’t approach construction accounting from a conventional perspective.