Bookkeeping for Construction Companies: An Essential Guide

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• Accurate record-keeping and ongoing vigilance are essential to ensure the balance sheet reflects the true value of the assets.
• However, with the right knowledge, systems, and tools, it’s manageable for businesses of all sizes.
• This helps streamline the process of setting up and managing the chart of accounts in both systems.
• Invoices help ensure that both parties clearly understand what services the contractor has provided, when, and for how much.
• It is critical to keep accurate records of employee hours worked, including overtime and any other special pay rates.

Tip 4: Account for contract retainage

On a high level, an asset is any resource with economic value owned or controlled by you. To simplify this, the balance sheet is your high-level view of finances from year to year. Underneath the balance sheet falls the income statement which depicts a specific period of time–the month of May, for example.

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If you https://www.bignewsnetwork.com/news/274923587/how-to-use-construction-bookkeeping-practices-to-achieve-business-growth don’t intend to hire a professional, follow these best practices for construction bookkeeping to keep your financial records updated. You need to have accurate bookkeeping not just for the sake of taxes and potential audits, but to monitor your cash flow and ensure you’re being compliant and profitable. Contract retainage is a common practice where customers pay contractors less than the project’s full cost. It ensures that the contractor meets all requirements and that the customer is satisfied with the performance before delivering the full payment. Generally, contract retainage is specified in the contract and is a percentage, typically five to 10 percent, of the total contract amount. Essentially, this ASU improves disclosure requirements, prompting more useful information out of financial statements.

• Under regular business accounting circumstances, revenue recognition is simple because they sell a product or service and collect a fixed price right away.
• Here are some things to look for when choosing the right bookkeeping software for your construction business.
• It’s important to keep in mind that once you establish a structure for your chart of accounts, it should remain consistent and shouldn’t change very often.
• Navigating the tax implications of assets transitioning from construction to fixed status requires an understanding of tax regulations.
• This enables them to access project information and communicate with other team members from anywhere.
• One of the keys for any business is to keep track of all indirect and direct costs.

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Properly managing and allocating overhead expenses is crucial for contractors, as it directly impacts the company’s profitability and long-term financial stability. A balance sheet is an overview of a company’s finances, including assets, liabilities, and equity. Even when they are not collectible within the “current” timeframe of 12 months, retainage accounts are typically shown as current accounts and current liabilities, respectively. As a result, the financial statements of construction companies often include a paragraph describing the special treatment of retention. Understanding each contract type and knowing which projects call for a certain type of contract will help construction businesses keep track of their costs and revenue more accurately.

• For example, a straight-line method provides consistent expense over time, whereas an accelerated method might offer larger deductions in earlier years.
• Construction companies usually need to pay their workers what’s known as a prevailing wage.
• Accurate record-keeping of project-related expenses is made possible by bookkeeping.
• Accounting software makes it easier to keep your records accurate, neat, and tidy.
• Improper tracking of payments can lead to compliance issues and inaccurate job costing.
• Tracking these costs separately helps bookkeepers identify discrepancies early and maintain control over the budget.

You can use Botkeeper to connect your books to your bank account and simplify reporting. It can also organize and pay bills for you, as well as collect payments and follow up on outstanding invoices. However, there’s still no software available that can automate the entire bookkeeping process.

Handling Payroll

Consistently generating these reports allows contractors to make informed financial decisions and adjust project strategies if needed. Construction bookkeeping can differ from traditional bookkeeping because construction companies have unique financial needs. For example, they usually have longer billing cycles than other businesses, which means it may be difficult to forecast revenue accurately. Construction companies are also likely to encounter unexpected business expenses that must be paid quickly, so they need access to a larger cash reserve. Each construction accounting method provides valuable insight into a project’s financial impact that helps ensure projects stay on track, on budget, and succeed. When choosing the right accounting method, you should consider your business’s unique needs and objectives.

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Accrual basis accounting is a method contractors use to record financial transactions that involve revenue or expenses in the period they are incurred rather than when they are paid or received. This accounting method is great for small construction businesses that don’t have a high volume of sales or complex transactions. Hinakshi, a Content Writer and Social Media Expert at Outbooks, brings her passion for writing to every project. Specializing in tax preparation, management accounts, cash flow, and VAT returns, she creates engaging, well-researched content that simplifies complex topics.

• This process helps contractors understand the profitability of each project and make informed decisions about resource allocation and pricing.
• The Davis-Bacon Act (DBA) is a United States law that requires employers to pay prevailing wages—the regional minimum pay requirement—on public works projects for laborers and mechanics.
• Another important aspect of expense management is ensuring that all expenses are properly documented and accounted for.
• Contractors and real estate developers use GAAP construction accounting to  increase their financial accountability and provide valuable peace of mind to customers.
• Bookkeeping for construction companies is based on construction contracts, which typically last longer compared to other industries since projects can take months or years to complete.
• Remember, accurate financial data is your blueprint for success in the competitive construction world.

Understanding Retainage

Consider this resource a jumping-off point — we’ll outline the construction bookkeeping basics and point you toward more in-depth guides on each topic covered so you can keep your construction company moving forward. All of these factors make construction bookkeeping an essential element for businesses. With so many moving parts, it is easy for records to be forgotten, lost, or not entered in the books at the right time.