<img src="https://analytics.humanautomation.ai/ha-analytics.php?idsite=74&amp;rec=1" style="border:0;" alt="">

 

The Botkeeper Blog

Bookkeeping, accounting, and business resources to help you become a finance guru. 

6 min read

Construction Accounting Basics for Contractors

Oct 10, 2019 2:28:07 PM

Account b-01

A day in the life of a contractor is a busy one. You’re up early to answer emails and sort through paperwork before heading to a jobsite. From there your day is full of meetings with subcontractors, reviewing the progress they’ve made, and making sure your project is on track and, more importantly, on budget.

But budgeting is just one part of the equation. Contractors have to think about tons of financial factors from billing to the cost of labor and production. And since contractors work on a project basis, things are always changing.

That’s why it’s so important that you and your team not only understand accounting best practices but have specialized knowledge of the construction industry too. The success of your business and the satisfaction of your clients rely on knowing construction accounting basics—but if you don’t have a financial background, it can feel like an uphill battle. This can feel like building a house without laying the foundation first, and we all know that would be a bad build!

Not sure where to start? Here are the construction accounting basics all contractors should know.

 


Account b-02

Construction Accounting Basics: Key Differences Between Construction Accounting and Regular Accounting

Whether you’re taking on the responsibility yourself or looking to hire someone who knows how to do construction accounting already, there are key differences between construction accounting and regular accounting to keep in mind.
 

Project-Based Accounting

As a contractor, you work from project to project and often, on multiple projects at once. While businesses in other industries typically set up their accounting procedures based on a single transaction, in construction accounting, the lines are far more blurred. Income doesn’t always appear directly after the work is done. In fact, it can take months to be recorded in the books.

It’s helpful to view each project as a single entity with separate profits and losses from other projects. Although complicated, it can be an efficient way to keep track of the costs associated with each project you and your team are working on.
 

Limited Sales

Businesses in other industries typically have accounting teams that keep track of products in various categories—but not contractors. In the construction industry, there are a variety of line items included across several jobs. Keeping track of all the moving parts and separate demands for each project requires keen attention to detail and effective communication across all teams. It’s safe to say things can get confusing fast. That’s why to help prevent errors with this kind of accounting, many rely on construction bookkeeping and accounting software that leverages automated technology to eliminate the error-prone, time-consuming, and mundane tasks.
 


 

Mobile Work and Production

Another challenge those in the industry face is how to handle construction accounting basics when so much of your operation is constantly moving. Equipment and personnel move from site to site (sometimes across state lines) to complete a variety of jobs. That isn’t the case in many other industries. When both the labor and production take place in a single location, travel time, insurance, and other related expenses aren’t a consideration. Construction professionals need to figure out how to do construction accounting when everything is in motion.
 

Irregular Contracts

Construction companies run on long-term contracts with flexible end dates. New challenges and opportunities can change the timeline and the expenses to any project at any time. Therefore, it’s not uncommon for work and revenue to be added to the books earlier or later than expected. For some contractors, construction accounting basics and being flexible go hand in hand.
 

Fluctuating Overhead Costs

The final major difference someone will see when learning how to run the accounting in a construction business are the ever-changing overhead costs. Workers’ compensation, insurance, training, sub-contractors, partners, and other factors are more relevant to construction accounting than most other industries. So even if nothing changes on the projects from month to month, the overhead costs will still change.

 


 
Account b-03

How to Do Construction Accounting: Best Practices

Sound like a lot? Luckily, complex problems aren’t impossible problems. In fact, figuring out how to do construction accounting correctly can be a fun accomplishment for many business owners. To grow beyond construction accounting basics and get your company to thrive, implement these best practices as soon as possible.

  • Create Job Costing Goals
  • Use Clear Tax Strategies
  • Leverage Construction Accounting Software

Create Job Costing Goals

Job costing is the best way to get accurate construction accounting forecasts. Whether you’re bidding on a new project or anticipating the amount of cash you’ll have on the first of the month, job costing can help.

Job costing is the procedure in which expenses and profits are projected for phases of a job. In job costing, everything from materials, labor hours, and overhead costs are given a projection. It provides a comprehensive, detailed look into your financial statements.

To stay on track with job costing, however, you need your entire team’s dedication. Job costing goals provide a roadmap for those outside of accounting that explains why reporting data is important. It gives them an idea of where your company is trying to go and on what timeline.
 

Use Clear Tax Strategies

Taxes add an additional layer of stress to construction accounting basics. Before you do anything, determine the best tax strategy for your organization. As we mentioned, individual construction projects can span months or years and the revenue isn’t always consistent.

Most construction companies use a completion percentage approach. Income and expenses are reported the year they occur, making it easy to avoid major tax changes. You can try the completed contract approach to tax reporting as well. This method recognizes all the revenue and profit associated with a project only after the contract is fulfilled. Many find that it opens their business up to risks, including additional tax burden. But you might find that it works for you. The important thing is that you find a strategy and stick to it.
 

Leverage Construction Accounting Software

As a contractor, it’s important to have a pulse on your business’s finances—but you don’t have to go it alone.

You can make the biggest impact on the success of your construction accounting efforts by setting yourself up with a software solution that can work with you. The right automated construction bookkeeping and accounting software not only keeps your data clean, but it also helps you keep track of all the moving parts.



 

A construction bookkeeping and accounting software like Botkeeper can manage your day-to-day accounts, taking care of your billing, invoices, and any other expenses. Botkeeper can help you stay on top of accounts payable (AP) and accounts receivable (AR) and give you complete visibility into important reports like profit and loss (P&L) and cash flow statements.

Best of all, Botkeeper generates reports in real-time, so you can effortlessly track all your projects daily. This way, you can easily pull insights to help you track progress and identify opportunities. Automating construction accounting basics and beyond is the quickest way to elevate your business to the next level.

 


 

Account b-04

Learn How to Run the Accounting for Your Construction Business at Botkeeper

Botkeeper is a powerful automated bookkeeping and accounting solution preferred by construction companies like yours. Learn more about how we serve the construction industry and the features we’ve created to help you stay on top of all the moving parts in your business.

 

Let’s Talk Botkeeping

Aaron Sullivan
Written by Aaron Sullivan

Aaron is a content marketer with a background in writing and editing for social, email, and blogs. His experience is heavily focused on bookkeeping/finance, entertainment, and beer.

Post a Comment

Featured Blog Posts