Construction Bookkeeping Services

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. Retainage, or retention, is a percentage of the total contract value withheld by the client to ensure project completion. Accurately account for retainage amounts in your financial reports, as this impacts both your cash flow and overall project profitability. Without consistent financial reports, it’s challenging to understand project profitability and make informed decisions.

• Make sure that all payments meet prevailing wage and certified payroll requirements to stay compliant with labor regulations.
• These issues often arise due to various factors, including unforeseen site conditions, inadequate project planning, and changes in project scope.
• This can pose challenges for financial planning and forecasting, particularly for larger construction firms managing multiple projects simultaneously.
• Some of it is likely reserved for things like payroll, covering expenses, and paying taxes.
• In the construction industry, effective financial analysis is crucial for managing budgets, forecasting costs, and ensuring profitability.

Accrual and Cash Basis Accounting

Given the complexity of construction projects, which often involve varying pay rates, overtime, and different classifications of workers, effective payroll management is crucial. One of the key aspects of construction accounting is job costing, which allows companies to assign costs to specific projects. This process helps in identifying areas where expenses can construction bookkeeping be reduced and profits maximized.

Accounts Payable

This approach requires monitoring of contract values, project phases, and completion percentages to determine accurate revenue recognition. If you need help getting started or have outgrown handling your construction company’s books on your own, schedule a call with Slate. We can help you take the right approach to managing your successful construction business and ensure you’re generating enough revenue to cover all costs while still turning a profit. Recognizing revenue correctly is essential for construction accounting because construction contracts are often long-term and have an agreed-upon payment schedule.

Work-in-progress (WIP) reports

• For long-term projects, consider using the percentage-of-completion method for revenue recognition.
• Materials include all the resources required to complete the project, such as raw materials, tools, and supplies.
• Effective allocation of these costs helps ensure that each project bears its fair share of overhead expenses, contributing to a more accurate assessment of project profitability.
• However, each contract type — in combination with the company’s chosen accounting method — will affect the business’s finances and accounting system.
• Timely and accurate financial data ensures that project managers and contractors can make informed decisions based on a project’s current financial status.

General contractors need to subtract subcontractor payments from revenues to calculate working capital turnover, as this money simply passes through the GC from the owner. The income statement (or profit and loss statement) provides a breakdown of the revenues, costs, and profit during a specific period of time — often monthly, quarterly, and annually. Learn more about the differences between cash and accrual methods of construction accounting. Even with this advantage, the cash method is typically only viable for very small construction businesses. With the cash method, a company recognizes revenues when it receives payment and recognizes expenses when it pays bills.

How is Construction Bookkeeping Different?

• It ensures transparency for stakeholders and helps maintain trust in the company’s financial practices.
• Under cash accounting, if money hasn’t changed hands yet, there are no financial transactions to account for.
• In the construction industry, key financial statements play a crucial role in assessing the financial health and performance of companies.
• With multiple ongoing projects, fluctuating timelines, a diverse workforce, and countless subcontractors, construction bookkeeping can quickly become a daunting task.
• Accrual basis accounting is a method contractors use to record financial transactions that involve revenue or expenses in the period they are incurred rather than when they are paid or received.

Our connected global construction platform unites all stakeholders on a project with unlimited access to support and a business model designed for the construction industry. A business with a quick ratio above 1 is regarded as liquid, meaning that it has enough cash resources to pay its current liabilities. Conversely, a business with a quick ratio below 1 does not have enough cash resources, so it will need to get an influx of cash through financing or by selling other long-term assets. Examples of liabilities include accounts payable (AP), capital lease payable, accrued payables, and notes payable. Assets are a company’s financial resources — in other words, anything that is cash or could likely be converted to cash. As a result, construction companies often find it difficult to match the efficiency of companies that make the same products repeatedly in a controlled location.

Revenue recognition method #2: Completed-contract method (CCM)

It allows construction companies to allocate costs to specific projects, providing insights into profitability and financial health. This level of detail is vital for making informed decisions that can affect the overall success of a construction firm. This practice helps identify discrepancies early and ensures that financial records are accurate. By maintaining up-to-date records, construction firms can improve their financial reporting and compliance with accounting standards, leading to better overall management of their financial health. Construction accounting software, such as Sage Construction Suite and Foundation, offers comprehensive financial analysis features tailored to the unique needs of the industry.