While bookkeeping in the construction industry can be challenging due to its many considerations, it’s an essential part of successfully running a construction firm. Here’s what you need to know about bookkeeping for construction companies.
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What is construction bookkeeping?
Bookkeeping in construction is a unique kind of financial management and accounting. Not only is it used for tracking each job, but it allows you to analyze how expenses are affecting the firm as a whole. With proper bookkeeping (i.e., tracking and recording all payments and costs), firms will have a deeper and more informed understanding of their financial situation, allowing them to act accordingly.
Construction bookkeeping is important since projects in this industry tend to be complex. Calculating revenue can be difficult without the right information, especially when your firm works on multiple projects. All costs must be tied together in bookkeeping, including expenses from labor, equipment, materials, transportation, and insurance.
What makes bookkeeping for construction companies different?
There are several factors that distinguish bookkeeping in construction from other industries.
Payroll has unique considerations
For one, payroll for construction is more complex, and involves much more than agreeing on a flat rate for every project. Projects like government-funded projects require you to pay a prevailing wage, a minimum hourly rate that’s typically higher and determined by each state’s Department of Labor. Paying any lower than what’s legally mandated can result in penalties—and even jail time.
You’ll also need to take into consideration things like taxes, travel pay, and union rates.
Construction contracts are longer
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. Contract terms usually allow around 30 to 90 days for invoice payment.
Withholding retainers can further delay payment, which is why it’s important to accurately track costs and have funds available for shorter pay periods. Payment scheduling and collection are subject to different circumstances in the construction industry, making proper bookkeeping essential.
Costs fluctuate based on production, which differs from project to project
Construction bookkeeping is also based on production costs, which can vary since no two projects are the same. The decentralized nature of the industry sees production scattered, occurring in multiple locations. This causes mobilization costs from frequently moving equipment and people from site to site. Every job site needs to be tracked in terms of equipment and varying labor wage rates.
Production can also be less predictable, with some projects based on seasonal cycles. The fluctuating cost and availability of production require you to plan and track costs more attentively. Plus, operating across state lines adds another layer, as you’ll need to account for additional tax payments.
Things to keep in mind when bookkeeping
Here are some things to keep in mind when bookkeeping for construction firms.
Construction billing is unique
While other industries use billing methods like point-of-sale billing, construction payments are more long-term, yet decentralized and based on milestones. This makes billing more complicated, requiring specialized knowledge to manage and oversee it. Some firms have made use of construction bookkeeping software to track and simplify billing.
Job costing is important
Based on the project’s necessary job types and activities, you’ll be paying varying rates. It’s important to pay attention to job costing, as it can allow project managers and supervisors to accurately budget for future projects and determine how to improve estimates.
Accurate job cost accounting also allows you to analyze cash flow to ensure your project has enough funds to keep production moving forward. It lets you see all overhead expenses so you can accurately calculate profit.
Tips for bookkeeping for construction companies
Here are some tips for bookkeeping for construction firms.
Track invoices
Since construction jobs are invoiced on a regular basis, it’s important to ensure that all invoices are tracked and accounted for. Monitor when they’re sent, received, and paid for throughout the project. It’s not uncommon for firms to have multiple projects occurring at the same time, so tracking invoices ensures that nothing gets lost and falls through the cracks.
Not only does invoice tracking allow you to know where exactly your money is going, but it can also be useful if for some reason you ever need to prove business expenses.
Record daily transactions
Construction bookkeeping services like software make expense recording easier, though some opt for recording bills in a comprehensive journal. Regardless of your method, documenting materials, job costs, accounts receivables/payables, and other daily transactions is crucial to proper bookkeeping. Include who the payment was made to and the date on which they were paid.
Some things to record include costs for: equipment, repair and maintenance, fuel, insurance, and loans if applicable.
Pay and receive payments by milestone
Milestones see payments made after a significant stage of the project has been completed. This means that you won’t need to wait until the entire project is done in order to be paid by the client, which in turn improves the project’s cash flow. Another benefit is that milestone payments make identifying payment problems much easier.
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