How to Do Accounting for Your Construction Business 8 Steps

A balance sheet is an overview of a company’s finances, including assets, liabilities, and equity. The purpose of retainage is to ensure that owners have some assurance that contractors complete the entire job rather than abandoning work after progress payments are made. However, retainage can lead to significant cash flow challenges for contractors, who may lack the working capital necessary to take on new jobs if earned income is withheld. Job costing is a form of project-based accounting that helps construction companies keep track of the expenses for a specific job or project. AIA billing is a standardized billing method developed by the American Institute of Architects (AIA). It is commonly used in commercial construction projects and involves using specific forms (such as G702 and G703) to request payment based on the percentage of work completed.

Fixed-Price (Lump-Sum) Billing

For those operating in the construction industry, whether just starting out or as an established small or medium-sized business, managing business accounts often takes a back seat. The age of your accounts receivable, therefore, has become an important measuring stick for executives and other reviewers of financial statements. There are so many tasks on a building site that few people have time to take a special interest in construction accounting.

Manage your construction bookkeeping effectively

Overhead costs, which are essential for operation but not tied to a specific project, are listed on a separate area of the income sheet. Properly managing and allocating overhead expenses is crucial for contractors, as it directly impacts the company’s profitability and long-term financial stability. However, each contract type — in combination with the company’s chosen accounting method — will affect the business’s finances and accounting system.

Manage subcontractor payments:

Properly managing and allocating G&A costs ensures that they do not disproportionately affect the profitability of individual projects. 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. One way to solve this problem is to use accounting software like QuickBooks Online because it automates the bookkeeping process. Construction bookkeeping services like software make expense recording easier, though some opt for recording bills in a comprehensive journal.

By collaborating with them, you can free up your time and resources to focus on growing your business while they manage the financial aspects with precision and accuracy. Additionally, they can provide valuable insights into your business’s financial health and performance, helping you make informed decisions to optimize your operations and maximize your profits. If your construction business follows generally accepted accounting principles, you should use the percentage of completion construction bookkeeping method for financial statements as well. In this type of contract, it is essential to understand what costs will be included in the reimbursement clearly. For example, will the client reimburse for materials, labor, equipment rental, or other indirect costs? There should also be a clear understanding of which factors form the additional fee (e.g., as a percentage of total costs).

• Whether you’re an owner of a commercial or industrial cleaning company, or running a residential business, it’s only natural that you’re always on the lookout for new ways to…
• Keeping track of what is happening in your account can prevent you from being overdrawn, and identify any discrepancies in spending.
• Our mission is simple — help contractors streamline operations and navigate workforce planning complexities.
• For example, time and materials contracts require sophisticated cost tracking to file for reimbursement.
• This improves communication, opens up lease opportunities and can accommodate most real estate situations.

Job Profitability Report

• Look for a solution that has a simple dashboard that allows you to access everything from the general ledger to reports with a few clicks of the mouse.
• Are you running a construction business but feeling like the financial and accounting portion of it is a little overwhelming?
• There are other aspects of construction accounting that make it unique from general accounting, as well.
• Instead, this amount is a Liability on the balance sheet, representing the amount of money the contractor still owes for the project.
• While there are common traits between bookkeeping for construction companies and other industries, certain differences set them apart.
• Using Hubstaff’s time tracking app for construction businesses, you can automatically generate time cards for your workers.

The current ratio evaluates how readily a company can use its current assets to cover its current liabilities. To calculate the current ratio, simply divide current assets by current liabilities. Importantly, the income sheet’s view of profit must match the change in equity reflected on the balance sheet. You should also ensure it’s compatible with the size and type of company you have. Develop an easy-to-follow system and create a habit of recording each transaction at the end of each workday. For those who love hard work, spending time outside, and being your own boss, starting a landscaping business may be a great https://www.inkl.com/news/the-significance-of-construction-bookkeeping-for-streamlining-projects fit.