Mastering Bookkeeping for Construction Companies: A Comprehensive Guide

Once the trial is complete, you can determine which plan best suits your construction business. Good construction management software should have real-time financial information available at a glance. This step in the process is all about ensuring the accuracy of your financial info. While you can prepare adjusting journal entries yourself if you’re comfortable doing so, we recommend working with an accountant or CPA to make sure your books are accurate and complete. What’s one thing that every business—large and small, new and established—needs to thrive?

Why is construction accounting so hard?

Use time-tracking software or detailed timesheets to ensure accurate allocation of labor costs to each project. Begin by organizing your finances with a chart of accounts tailored to the construction industry. Include categories like materials, labor, subcontractors, equipment, and overhead costs. Unfortunately, this becomes so commonplace that even once the business is established and successful, expenses are still paid out of a personal bank account.

Relies On Long-Term Contracts

With so many moving parts, it is easy for records to be forgotten, lost, or not entered in the books at the right time. Contractors can get to the most recent financial records whenever they need them using construction bookkeeping software. Because of this, they can make intelligent choices based on data that is updated in real-time. Because customers’ payments arrive at various times, unpredictable cash flows are expected. https://www.inkl.com/news/the-significance-of-construction-bookkeeping-for-streamlining-projects With accurate construction accounting, companies can better manage their liquidity and prepare for cash shortages. By leveraging digital invoice capture and automated approval workflows, you can streamline your invoice processing and payment cycles while eliminating the need for manual data entry.

Billing, Accounts Receivable, and Revenue Recognition

The best way to stay organized is tracking your day-to-day transactions, reconcile your accounts on a regular basis, and use construction accounting software. Improving your process starts with understanding how construction accounting is unique, and determining the different types of job costs you can incur on each project. Since construction accounting is project-centric, you’ll need a way to track, categorize, and report transactions for each job. Generate regular financial reports, including profit and loss statements, balance sheets, and cash flow statements, to get a clear picture of your company’s financial health. When tracking your transactions, a double-entry bookkeeping system is the best way to ensure your records’ accuracy and reliability.

• However, there’s still no software available that can automate the entire bookkeeping process.
• This is especially true with a company that uses mostly long-term contracts, which are generally more compatible with the percentage of completion method.
• Contractors can get to the most recent financial records whenever they need them using construction bookkeeping software.
• When embarking on a project, it’s important to break down the costs into manageable categories to ensure the budget is well-managed.

This is especially true with a company that uses mostly long-term contracts, which are generally more compatible with the percentage of completion method. Even with this advantage, the cash method is typically only viable for very small construction businesses. Retainage billing is a practice where a portion of each progress payment is withheld until the project is substantially complete. Proper job setup and maintenance are critical to the success of any construction project. Establishing a solid foundation at the beginning of a project ensures that all aspects of the job are clearly defined, budgets are set accurately, and changes are managed effectively.

• These costs are typically spread across all projects or allocated proportionally based on certain metrics such as revenue or labor hours.
• However, all three sections are related, as total assets are equivalent to the sum of liabilities and equity.
• Working capital turnover measures how much revenue each dollar of working capital is producing.
• As a result, accurate accounting and careful financial analysis is essential for construction businesses to stay sustainable and grow.
• Construction bookkeeping is a form of bookkeeping unique to the construction industry.
• Once the trial is complete, you can determine which plan best suits your construction business.

In this guide, we address some of those challenges and cover the basics of construction accounting. Follow this resource step-by-step to establish an effective accounting process, avoid costly mistakes, and make more money. Regardless of the option you construction bookkeeping choose for your bookkeeping needs, it is useful to understand the process involved in construction bookkeeping.

• 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.
• Also referred to as “revenue recognition”, it represents the point at which a construction project becomes profitable.
• Also, it might not be easy to assess the profitability of individual projects.
• Use a journal, spreadsheets, or construction accounting software to record day-to-day transactions like accounts payable, accounts receivable, labor costs, and material costs incurred.
• The average hourly rate for an accountant in the U.S. is about $35, making it quite affordable for the average owner.