Running a construction company requires different bookkeeping methods than goods or service businesses. Shifting costs, liability, and job-centric pricing models create unique accounting challenges that require a specific approach.
This approach includes using separate accounts for customer payments, payroll, taxes, and expenses to provide a more accurate picture of your financial status.
Job Costing
During construction, your company may be working on several projects at once. Efficient job costing helps you keep track of the profitability of each project by ensuring that all direct and indirect expenses are properly attributable to each job. This includes all costs incurred by your field workers and subcontractors and all raw materials, including lumber, wiring, screws, and other building supplies. That is why bookkeeping for construction companies is essential.
Indirect costs, such as utilities and insurance, are also considered part of the job costing equation. This data can help you determine how your construction business performs on various contracts based on their scope of work and overall profitability and identify improvement opportunities. Thorough tracking and analysis over time can also reveal repetitive tasks that could be automated or misallocated employee resources, enabling you to make more informed decisions in the future. Ultimately, this process will help you avoid overages and surprises that hurt your financial planning and compromise customer relationships.
Taxes
The complexities of running a construction company should be considered. Shifting costs, increased liability, and a project-centric pricing model make construction unique in its needs and require a different accounting approach.
A robust bookkeeping system clearly separates personal and business expenses, making it easy to see where your money is going and providing accurate tax season information. It’sIt’s also essential for a company to have separate accounts for payments received from clients, payroll, and taxes to avoid any confusion over what revenue is coming into the business and where it is going.
In addition, a well-established bookkeeping process makes it easier for a construction business to identify overhead costs that may be able to be shifted back to other jobs, saving the company significant amounts of money. It also ensures that contract retainage is properly recorded – a specified amount withheld from final payment until the client confirms that the job has been completed.
Payroll
Construction workers must meet specific legal requirements and adhere to prevailing wage laws. Getting payroll right is essential to satisfy regulatory and compliance needs, keep costs low, and produce accurate income statements.
Income statements summarize revenue and expenses accrued during a period and help you forecast your financial future. You’ll need a balance sheet, which provides a snapshot of your business’sbusiness’s assets and liabilities, and an income and cash flow statement.
Construction companies often have several projects simultaneously, frequently moving equipment between sites. To accurately track these expenses, you must use a method of accounting called job costing. This helps you understand each project’s actual costs and revenues and enables managers to make informed financial decisions. The data from past job ledgers can then be analyzed to improve estimates, budgets, and profit margins for future projects. This creates a powerful cycle of accurate data that leads to better decisions for the entire company.
Inventory
Construction companies must keep their inventory control systems working at total capacity, whether on a project or in a warehouse. The right inventory system helps reduce waste and lost productivity from ordering supplies at the last minute.
As a unique industry, contractors work with cyclical accounts and long-term contracts that require careful accounting. In addition, they’re juggling multiple projects and job sites in various locations. This requires a dedicated bookkeeping team that’sthat’s experienced in managing these complicated accounts and understanding the industry and its challenges.
Construction companies can create powerful data cycles that optimize bids, estimates, and profit margins for future projects by using a robust system for recording and tracking job-specific costs and revenues. This is done by analyzing past job ledgers to gain a real-world understanding of actual costing and production. This also helps eliminate inaccurate and obsolete inventory by enabling management to access past historical data for future use easily.
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