The Ultimate Guide To Construction Bookkeeping

Before choosing a bookkeeping software, ask if they offer a free trial and use that time to get familiar with the way it works. On the other hand, if it’s super easy to use but doesn’t provide the flexibility you need, you should consider trying a different one. If you construction bookkeeping don’t have a highly accurate and efficient construction bookkeeping system, the rest of your business will suffer. 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.

A Guide to Construction Bookkeeping (for Non-Accountants)

You could have one account reserved for paying expenses, another one for managing payroll, and a third one for receiving payments for clients. Keeping all your company’s money in a single bank account makes it harder to understand how you’re doing financially because all the money in the bank account might not necessarily be yours. The decentralized nature of the industry makes construction bookkeeping so unique. This can make it difficult to track revenue and costs on a single project, let alone many. Construction bookkeeping, while challenging, is an essential part of running a construction company.

The Importance of Construction Bookkeeping

Most construction workers are paid hourly, so labor costs represent the cost of the hours worked by a particular crew. Labor costs are less predictable, mostly due to unexpected events or interruptions (weather, illness, etc.) that can have a crew falling behind. Since most construction contracts want the jobs completed as soon as possible, labor can also include overtime pay, meaning crew hours must be tracked carefully. Esub, a construction software company, explains that construction work is very little like retail or manufacturing, and that’s true down to the financial records. In those industries, business is normally the same from day to day, and costs stay relatively constant and predictable over time. Each construction accounting method provides valuable insight into a project’s financial impact that helps ensure projects stay on track, on budget, and succeed.

Compliance with Tax and Legal Requirements

• While mastering job costing might help you track project expenses, navigating the labyrinthine world of construction taxes can feel like building a tower with blindfolds.
• If your construction business follows generally accepted accounting principles, you should use the percentage of completion method for financial statements as well.
• Unfortunately, it’s not as simple as agreeing on compensation with a worker and paying them the same rate per project.
• Don’t worry if you’re not sure what the difference is, this blog will explain how to do construction accounting easily.
• We’ll efficiently track project costs, manage cash flow, and ensure tax compliance.

Lastly, as Hubstaff records workers’ arrival and departure times, there is no need for them to note down this information manually. Botkeeper is a bookkeeping solution that uses artificial intelligence and machine learning combined with human accountants to deliver a comprehensive bookkeeping service. Once you complete the project, you can then issue a final invoice for the entire value of the retainage. As we mentioned earlier, contract retainage can account for 5 to 10 percent of your contract value. This helps you get a better idea of how much money is coming in and going out of your business every month.

• By implementing internal controls, using software and tools, and hiring tax professionals, construction companies can improve efficiency and reduce the risk of errors and fraud.
• Materials are usually straightforward to estimate going into a contract, unless something surprising is found while doing the work.
• In general, a construction business with gross receipts (also known as Business Tax Receipts) over $10 million must use the percentage of completion revenue recognition method for tax purposes.
• In this guide, we address some of those challenges and cover the basics of construction accounting.
• Equipment costs include renting or purchasing machinery, vehicles, or other specialized tools needed during the project.
• Not only does bookkeeping help manage expenses but it allows you to make better business decisions down the line (it’s also very easy!).

You should also ensure it’s compatible with the size and type of company you have. It’s best practice to set a reminder so that you have enough time to complete your tax returns without any mistakes. An easy fix for this is opening up a separate account that’s solely for business if you haven’t already.

Incorrectly categorizing expenses

For example, instead of a fixed 10% holdback on each progress billing, you might negotiate terms that reduce that rate to 5% once the job reaches the halfway point. Keeping enough cash on hand is a serious challenge in our industry, especially on longer jobs. To maintain a positive financial position, you’ll want to use progressive billings (aka progress billings). Instead of a lump sum at the end, progress payments are made in regular installments (usually monthly) as a project progresses. 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.