Running a successful construction business comes with aspects that you love but it can also be painful, especially if you are not a numbers person. Construction accounting brings unique challenges compared to other industries; however, it does not have to be a headache. It will require diligence, attention to detail and some accounting experience. If you choose to take this task on, here are five key points for good bookkeeping practices in the construction industry.
#1: Progress Billing
Allows contractors to bill at different intervals, and payments are based on percentage of project completion. This method of billing helps with cash flow problems and is an initiative for the contractor to complete the project swiftly, as payment will be received when the next milestone is reached. By setting up construction estimates for contracts and using those estimates to progress invoice your customers, you can ensure that nothing will be forgotten while maintaining an adequate level of funding throughout the duration of the project.
#2: Contracts & Record Retention
- AIA Contract Documents – standardized legal forms and contracts that define the terms for construction projects. Proper construction invoicing utilizes AIA forms and releases to ensure your submitted billing will always be approved.
- Lien Releases – confirm that all necessary Lien Releases are received from subcontractors and suppliers, as this will ensure that payment has been effectuated and the lien has been discharged. All legal responsibilities have been completed, therefore legally protecting both parties.
- Tax Documents – ensure tax documents and proof of insurance from vendors are in place before project begins. This will be helpful in the long run and keep you protected during and after the construction project.
- Record Keeping – not only is record keeping a good business practice, but maintaining all documents related to contracts costs is a protection against liability. This will allow your company to defend itself against claims or be in a position to administer claims. Be sure to keep all subcontractors agreements on file and have them easily accessible, as referring back to them frequently during a project is not uncommon. A good rule of thumb is to keep documentation for at least 7 years, in the event that you company gets audited by the IRS.
#3: Reports and Estimates
- WIP (Work in Progress)schedule/report – gives you an arial view of the project by allowing you to see the percentage of completion at any given moment, and a consolidated WIP can show you where all your current projects stand on a monthly basis. This accounting method is a key element used to identify accurate profitability for your construction project. Additionally, this gives financial stakeholders that are invested in your project a reliable financial performance of your company.
- Estimates – keep thorough and updated estimated contract costs for each job. The estimated cost to complete is important to making sure your job remains profitable and the revenue is recognized correctly.
#4: Job Costing
Vital accounting practice used to calculate the actual costs of working on a construction project, allowing you to take the overall project and break it down into more specific tasks. Implementing a coding system is recommended in order to keep items organized. Having this in place will allow you to create budgets and predict margins. Job costing is essential to your bottom line, and the ability to accurately and effectively estimate your job costs on any project can truly make the difference for running a successful construction company.
- Overall – this would include but not be limited to subcontractors, materials, insurance, vehicle, equipment costs. All items need to be properly allocated to the correct job. Remember to also include overhead items such as taxes, rent, workers comp insurance, etc.
- Employees – calculating the actual cost of an employee working on a construction project is critical. Determining an accurate and detailed estimate from everyone on your team is important to keeping your business profitable, as this can be a large percentage of your costs. Running these reports regularly can allow you to have a finger on the pulse on your project, and help you identify what is too high and if/where adjustments can be made.
- Payroll Set Up – Maintain payroll compliance with multiple jurisdictions. Capture time effectively and accurately to avoid costly errors.
- Certified Payroll – specialized payroll required for government or military projects.
As you can see, some details that go into construction accounting are complex and different than other businesses. Accounting industry specific experts rely on different methodologies to track direct and indirect costs associated with your business. They will help outline and minimize expenses while ensuring maximization of your bottom line, as well as company growth and success.
However, if you choose to do this in-house, be sure that you consider the above key elements, among others. Properly taking these essential factors into account will allow you to have sound accounting practices and minimize the risk of costly mistakes.