A Simple Guide to Bookkeeping in the Construction Industry
Running a construction business involves more than just knowing the trade; managing your finances is equally important. Keeping track of your financials is crucial to staying on top of your business, and that’s where bookkeeping comes in.
Bookkeeping might sound like a lot of work, but it’s all about keeping organized records of your income and expenses. This helps you keep tabs on your money, ensuring you know where every dollar is coming from and going to.
In the construction industry, things can get a bit trickier. Each project can vary in size, scope, and timing, which means your bookkeeping needs to be just as flexible. Accurate bookkeeping helps you manage these complexities and keep your business running smoothly.
In this blog, we’ll break down the essential tips for handling bookkeeping in a small construction business, making sure you have the right tools to keep your finances in check.
Tips for Better Construction Bookkeeping
1. Understand the basic and essential process flow
First and foremost, you have to understand that every construction project differs from one another. This just means that budgets, costs, timing, and even external (political and economic) factors from the procurement process to the project implementation, can vary. So, you can treat one project as one profit-generating center. Meaning, it has its corresponding fund, assets, liabilities, income, and expenses.
2. Establish a separate business account
You as a person and the business on its own are two separate entities. Therefore, it is crucial to separate each one’s transactions. It is ideal to open a separate bank account for your construction business. This way, there will be no confusion and incorrect account charges will be avoided. Plus, it will be easier for you to track down how much you have already spent and how much you have already earned from the business exclusively.
To make the flow of finances even more organized, you can likewise open multiple accounts for your business. Open one account solely for payroll, expenses (to suppliers), collection (from clients), and taxes.
3. Maintain a complete chart of accounts
The chart of accounts is the foundation of bookkeeping. You can’t effectively manage your finances without an established chart of accounts. It’s a detailed list of categories and subcategories where you record each transaction.
Here’s a quick rundown:
- Assets: Short-term and long-term items your business owns.
- Liabilities: Short-term and long-term debts your business owes.
- Equity: Your business capital and retained earnings.
- Income: Revenue from construction projects and rental income from leases.
- Expenses: Includes direct costs of construction, as well as indirect, administrative, marketing, and financial expenses.
This list can get long, but having a well-organized chart of accounts helps ensure accurate record-keeping.
To make things easier, we offer a construction chart of accounts template that you can download and use for your business. It’s designed to help you set up and manage your accounts efficiently.
You can download your template here!
4. Contract retainage
Customers/clients will typically withhold a certain percentage (5%-10%) from the contract price as a form of security for the completion of the project. Ensure you also account for this as a credit to your initial billings/invoices. You can collect the retainage upon completion as the final invoice.
5. Use the proper job costing method
Since construction is project-based, it is appropriate to assign costs by job. Costs are further broken down into three categories: direct materials, direct labor, and factory overhead (indirect material and labor).
When costs are allocated for a job and other related expenses are determined, it will now be easy to calculate a project’s profit.
For long-term projects, it is best to set milestones. With each major milestone accomplished, progress billings can then be sent to the client or based on the contract. Through this, cash inflows will be consistent.
6. Record transactions regularly
Regular bookkeeping is vital. If possible, do it daily so that no one transaction is unrecorded.
Keep all official receipts, invoices, and other pertinent documents intact. These will serve as support and backup, especially during the audit. Keeping attachments is also a standard way of observing proper bookkeeping.
Maintain separate ledgers for relevant accounts such as accounts receivable, accounts payable, construction-in-progress (work-in-progress), and even the job costs for simple movement/change monitoring.
Reconcile your records of income and expenses against your bank statements monthly. Through this, you can identify discrepancies and find ways to resolve them.
7. Choose the appropriate revenue recognition method
The most common revenue recognition methods are the following:
- Completed Contract – No revenue is recognized until the construction project’s completion. This is only ideal for short-term projects.
- Percentage of Completion – Revenue is recognized as per the year-end level of completion. Amounts recognized over the term are cumulative so for computing the current year’s profit, you should deduct the prior years.
8. Hire experts/professionals
While managing bookkeeping yourself is an option, working with professionals can make a big difference. Experts in construction bookkeeping are skilled at handling the specific financial complexities of your industry. They can ensure accuracy, stay on top of tax regulations, and save you time. This allows you to focus on growing your business and handling day-to-day operations without the added stress of financial management.
9. Integrate with relevant software
Automating your construction bookkeeping with the right software can streamline your processes and reduce errors. Proper integration between systems like ServiceTitan and QuickBooks is crucial for accurate data entry, invoicing, payroll processing, and financial reporting. Without seamless integration, you risk costly mistakes and inefficiencies.
Getting these integrations right can be complex, but it’s essential for maintaining smooth and effective operations. For more insights on how to ensure your software integrations work perfectly, check out our detailed blog [here].
Need more help with your construction bookkeeping?
Handling construction bookkeeping can be a lot to manage, especially for small business owners. But getting it right is crucial for keeping your finances in order and your business running smoothly.
At Atlas Accounting Group, we specialize in construction bookkeeping. We’re here to help simplify the process and make sure your financial records are accurate and up-to-date.
Book an introductory call with us, and let’s discuss how we can support your construction business with expert bookkeeping tailored to your needs.
Simply head over to our Get In Touch page to get started.
Until next time!
