A shoddy accounting system can have severe consequences in the construction industry. Incorrect estimating, underbilling, and misallocating expenses can lead to unaccounted-for losses and budget overruns.

In addition, project-based businesses often have to deal with lengthy contract lengths, making scheduling payments and expenses difficult. Thankfully, accurate record-keeping practices are the answer.

Tracking Job Costs

Construction production is project-based and long-term, unlike many other industries where billing occurs at the point of sale or on a regular monthly basis (think buying office supplies or subscribing to a streaming service). In addition, many different processes can occur when delivering a building. These include progress and change orders, customer deposit and retainage management, and other specialized accounting needs like cost code tracking.

A company’s daily expenses are tracked using a formula called job costing. This provides a macro-level overview of all costs and micro-level detail for individual projects. For example, a foundation pouring worth would be tracked with the cost code “laying concrete.” This could be broken down further to show materials, labor, and overhead. Other unforeseen or one-off fees are also included, such as worker’s comp and equipment repair. The granularity that job costing offers makes it an essential tool for construction businesses.

Keeping Track of Payroll

Construction work is often done in different locations, meaning workers and equipment must be moved from site to site. This requires keeping detailed records of each job to account for payroll and other daily expenses. It also means that a contractor must track local wage rates, tax requirements, and labor regulations.

Large construction projects can take months or even years to complete, and weather, raw material shortages, or other issues can impact them. Consequently, a construction business must often use the accrual method of accounting, which recognizes revenue when invoices are sent out, even if payment is yet to be received.

This makes it critical for contractors to track their costs carefully, including change orders, which are notorious for derailing budgets and eating into profitability. The best way to do this is with the help of a comprehensive job costing system, which will provide a clear view of how much a project costs so that budgets can be adjusted accordingly.

Keeping Track of Inventory

While tracking inventory can be as simple as a spreadsheet or handwritten log, many construction companies use an accounting system that allows them to keep detailed counts periodically. This method helps prevent over-ordering while ensuring that every cost is recorded accurately.

Unlike product-centered businesses, which can recognize revenue using cash or accrual methods, bookkeeping for construction companies must determine a specific way to handle contract revenues and expenses. This can be complicated by the different contract types, such as time and materials, unit price contracts, guaranteed maximum price contracts, and cost-plus projects.

Each method requires careful handling to ensure that each project is accounted for correctly. In addition, construction companies must also consider contract retainers, which are usually 5-10 percent of a contract’s total value that is withheld until work has been completed satisfactorily. These account for additional overhead costs and can cause a significant difference in the overall profit margin of a project.

Keeping Track of Contracts

Keeping accurate records and correctly categorizing business expenses is essential for construction companies. These businesses typically have multiple projects and a prolonged period for each contract. This can make it difficult to determine when revenues should be recognized.

Construction companies often use different specialty contractors and suppliers for each project. This can lead to consistency, inefficiencies, and even cash flow issues. It also requires a complex bookkeeping process to track these expenses accurately.

Many construction companies use a method called job costing. This allows them to forecast project costs by estimating labor, materials, and overhead costs. This information is then used to optimize bids, estimates, and profit margins.

Construction companies can use several accounting methods, including cash, accrual, percentage of completion, and completed contracts. Each has its advantages and disadvantages. Cash accounting is the simplest, but it limits the ability to analyze financial results and make proactive decisions. It also can cause problems with local taxes.