Construction companies work in a volatile environment with uncertainty in construction projects and their cash flow. To deal with this, effective bookkeeping service is crucial.
Every business needs a strong bookkeeping system at its core to account for the everyday variables that make a business profitable—taxes and fees, payroll, expenses, etc. Bookkeeping is a highly specific task, and it’s understandable that not every business owner would know how to, or would even want to, take on the job themselves.
When it comes to construction companies, though, bookkeeping is even more important due to the highly variable nature of what makes individual jobs, and construction firms as a whole, profitable. That’s why a good bookkeeping service is indispensable for most construction company owners, whose skills are geared to building and organizing things on a large scale—and who may want to leave the numbers to bookkeeping for construction professionals.
Let’s take a look at some of the major differences between regular bookkeeping and construction bookkeeping.
Custom Bookkeeping vs Construction Business Bookkeeping: The Main Difference
Construction bookkeeping is a specialized type of bookkeeping tailored to reflect the unique nature of the construction business accurately.
Construction bookkeeping differences from that of other companies are mainly due to the complexity and number of variables involved in calculating a construction company’s profitability. Construction firms need to contend with per-project pricing, fluctuating operating costs, and other unpredictable price points to track and report expenses, bid on projects, manage payroll, and manage other important accounting responsibilities.
Some of the biggest differences between regular bookkeeping and construction bookkeeping include:
REGULAR BOOKKEEPING
- Focuses on retail outlets, product lines, or services with relatively simple revenue streams.
- Production occurs in fixed locations.
- Contracts are often standardized and payment occurs at a point in time.
- Direct costs are relatively predictable.
- Changes to contracted goods and services may be rare, depending on the business.
CONSTRUCTION BOOKKEEPING
- Project-based: Focuses on individual projects, each with its own unique needs.
- Production is decentralized, with a mobile workforce.
- Long-term contracts tailored to each project, with complex payment schedules and revenue recognition rules.
- Direct costs fluctuate and are unpredictable.
- Change orders are the norm, especially for longer projects.
Why Construction Bookkeeping is Important
While other businesses may have mostly stable monthly expenses, a construction company works from project to project and may have different materials costs, payroll considerations, taxes, fees, or payment schedules every single time. It can be a big task to manage the intricacies of a construction company while also attempting to keep track of the financial records and tax burdens of the firm at the same time.
Without a good bookkeeping service, construction companies may find themselves choosing unprofitable jobs, losing revenue, and exposing themselves to tax liability. A professional bookkeeping company can help with certain financial concepts and practices like:
Separating Business and Personal Costs
By creating a separate bank account solely for their business, construction company owners can better separate their business and personal expenditures for tax and record-keeping reasons. A good bookkeeping firm can help you find a bank or credit union that best suits your individual needs.
Estimating Project Costs
It’s important to track, categorize, and report transactions for each job before your firm agrees to take on the work. Allocating expenses and revenue to each specific job will help you prepare to pay your taxes and provide accurate profitability projections by ensuring your service price covers all relevant materials and fees.
Scattered Custom Projects
The decentralized nature of the industry makes construction bookkeeping so unique.
No two projects are the same. It costs money just to move people and equipment to different sites. If you operate across state lines, you may also need to account for additional tax payments.
The more projects your construction company manages and the more workers you contract, the more important it is to have your accounts in order.
Contract Value and Duration
The high price and length of construction projects make payment scheduling and collection unique.
In most industries, commissioned contractors get paid upon delivery of a product or service.
However, construction projects can take months or even years to complete. This makes accurate bookkeeping essential.
Recording Transactions
With a ledger or accounting software, you can record transactions like accounts payable, accounts receivable, labor costs, and material costs along with the appropriate dates, amounts, or other identifying information. This will better help you invoice your clients and keep accurate records of all project costs and revenues.
Recording Business Expenses
Specifically tracking your expenses can also help you better understand your per-job costs. Some of the most common construction expenditures include payroll, subcontractor fees, equipment, and material purchases. By saving your receipts and making notes of your expenses promptly, you’ll have a better understanding of which jobs are costing more than the revenue they supply.
External Influences
Project costs vary according to the weather and season in which work is due to take place, as do the cost of materials and strain on workers and equipment.
You also need to keep in mind that the construction industry is highly susceptible to political and economic fluctuations.
It’s not uncommon for circumstances beyond your control to impact the price of materials, equipment, and labor costs.
Unique Payroll Considerations
Keeping track of payroll is another element where construction bookkeeping is essential. Unfortunately, it’s not as simple as agreeing on compensation with a worker and paying them the same rate per project.
Construction companies usually need to pay their workers what’s known as a prevailing wage.
A prevailing wage is the standard hourly rate for a worker in a particular state or locality determined by regulatory agencies and each state’s State Department of Labor.
Union rates, travel pay, and taxes can also impact how much you’ll need to pay your workers.
Manage Your Construction Bookkeeping Effectively
In the construction sector, the connection between operational efficiency and financial stability is crucial. Given the industry’s variable profit margins, intricate projects, and ever-changing market conditions, the line between making a profit and incurring a loss frequently hinges on streamlining operations.
Construction bookkeeping is a crucial part of running a construction business. Although it’s sometimes challenging, you can significantly simplify bookkeeping by hiring a bookkeeper or accountant to handle it for you.
Our accounting team has spent time and resources getting to know the intricacies of the construction field, and is well-versed in the unique obligations and strategies that make a construction company profitable.
Ready to experience accurate bookkeeping for improved decision-making and data accuracy within your construction company? Feel free to reach out to Filing Taxes at 416-479-8532. Schedule an NTR engagement appointment with us and take the first step toward proper management of your finances.
Disclaimer: The information provided on this page is intended to provide general information. The information does not consider your personal situation and is not intended to be used without consultation from accounting and financial professionals. Salman Rundhawa and Filing Taxes will not be held liable for any problems that arise from the usage of the information provided on this page.