How to do bookkeeping for small construction business
Accounting + Bookkeeping + AI The Trifecta for Smarter Financial Decision-Making
In the age of fast business, staying in control of your finances is not just about number-crunching. It’s about making savvy, strategic decisions that drive growth and that’s where the powerful pair of accounting, bookkeeping and AI in accounting and finance step in.
Running a small construction business poses its own set of financial challenges. Unlike traditional businesses, construction companies deal with material costs and subcontractor payments that may vary or fluctuate, project-based billing, and seasonal cash flow. So, bookkeeping is not just about writing down expenses, it’s about tracking profitability at the project level and being compliant with taxes.
If you are a contractor or a small construction business owner, here is a step-by-step guide on how to efficiently complete bookkeeping.
Why Bookkeeping is Important in Construction
Bookkeeping is the financial backbone of any construction company. It will assist you with:
- Tracking income and expenses for each project
- Maintaining cash flow to pay payroll and at the same time purchase materials
- Calculate bids and estimates accurately
- Staying compliant with tax and labor regulations
- Understanding what projects are profitable and which ones are not.
If a construction company does not have organized books, they risk underestimating costs, miscalculating payroll, and having serious compliance issues.
1. Organize Personal and Business Finances
To begin with construction bookkeeping, open a separate business bank account. When you mix personal and business costs, it can be challenging to track job costs, and personal expenses can lead to tax problems. A separated bank account allows you to keep your finances organized and make reporting the numbers easier.
2. Determine What Accounting Method to Use.
Most construction companies use cash basis accounting or accrual basis accounting.
Cash Basis Accounting: Cash basis accounting means income is recorded when it is received and expenses are recorded when they are paid. Cash basis accounting is very simple; however, it may not always present an accurate picture for accounting for long-term projects. Issues may arise when your projects last more than one accounting period, even just monthly accounting.
Accrual Basis Accounting: Accrual basis accounting means income is recognized when it is earned and expenses are recognized when they incurred. With this reporting basis, you can see a clearer picture of a project’s profitability, and accrual basis accounting is typically the better method to use when accounting for construction.
If your business is completing larger projects and hiring subcontractors for jobs, then accrual accounting would be the better option.
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3. Implement Job Costing
Contrary to retail or service-based businesses, construction companies must track every expense in relation to the specific job. To do this, you’ll want to incorporate a job costing system and document every direct and indirect cost related to each job including:
- Labor and subcontractor wages
- Materials and supplies
- Equipment rental
- Permits and insurance
Once you have developed a job costing system you’ll be able to see how each job generates profit and how potentially is detracting from your profits. Having a job costing system in place can also be beneficial when bidding on future work.
4. Manage Accounts Payable and Receivable
Construction businesses often do not get paid from a client until 30 days (or sometimes even later), but have to pay your suppliers and workers on time. Overall bookkeeping should include:
- Understanding accounts receivable (how much to invoices are still outstanding for clients).
- Organizing accounts payable (bills from vendors and subcontractors).
- Regular checks and communication to make sure accounts are current.
If you’re using accounting software, invoicing and reminders, and even scheduling payments can be automated.
5. Keep up to date with Payroll and Subcontractors
Labor is one of your largest expenses in construction. Whether direct employees or contractors, it need to be recorded properly to comply with tax and labor regulations.
In bookkeeping for construction that involves:
- Tracking employee time (for maybe one or two jobs/tickets)
- Classification of workers (who is an employee and who is a contractor)
- Filing payroll taxes and 1099 subcontractor forms.
This is to avoid expensive mistakes and compliance issues with the IRS regulations.
6. Look for Construction Friendly Accounting Software
Traditional accounting programs may not be set up for the needs of construction businesses. Try to find software that will allow:
- Job costing and project tracking
- Progress billings (billed as work completed)
- Integrate with payroll
- Track expenses as they occur.
Software like QuickBooks Contractor Edition, Sage 100 Contractor, FreshBooks, etc. are designed specifically for small construction companies.
7. Regular Financial Reviews
Keeping your books is not a “set it and forget it” procedure, and monthly financial reviews can help you with:
- Comparing estimated costs vs. actual
- Spotting cash flow problems early
- Preparing for tax time without stressing out
Many small construction companies hire part-time bookkeepers, or even fully outsource accounting to an accounting firm than knows the industry well.
Final thoughts
Bookkeeping for a small construction business is nothing like just recording the numbers; rather, bookkeeping is establishing control over your profitability, job sites, and cash flow. To create a solid financial platform for your business by separating your finances, utilizing job costing, appropriately preparing payroll, and using construction specific software.
Whether you manage the bookkeeping in-house or outsource it, consistency and accuracy are of critical importance. With the proper systems in place, you’ll not only stay compliant, but you’ll also be able to understand your financials well enough to grow your construction business with confidence.
