Construction companies can incur a lot of costs. Workers and equipment constantly move from site to site, which can be costly for the business.
Some construction companies use a percentage of completion method for their accounting, which recognizes profits and expenses based on progress. This can help the company make better financial decisions.
Managing Cash Flow
Construction projects can take months to complete, and the company may need to invest in materials, pay employee wages, and handle other expenses throughout that time. Accurate bookkeeping for construction companies allows the company to monitor cash flow and determine whether it needs to reduce costs or seek financing for future projects.
Contractors can also benefit from accurate accounting for per-job expenses, such as equipment rental and labor costs. Tracking these expenses accurately helps the firm identify cost-saving opportunities and make data-driven decisions that improve overall project profitability.
Managing cash flow is even more critical for construction companies than other businesses because of the long-term nature of many contracts. It can often be weeks before a customer writes and deposits a check to pay an invoice, and the company may need to keep its cash reserves to cover operating expenses. Correctly invoicing customers and establishing a strict mechanics lien policy can help the company speed up payments and strengthen its borrowing capacity.
Preparing Financial Statements
For construction companies to make intelligent financial decisions and navigate the industry’s complexities, they must have access to accurate, real-time data. Precise bookkeeping provides transparency, allowing businesses to identify improvement areas and develop strategic plans.
Unlike other industries that can operate in a factory setting, production for construction projects typically happens on different job sites. This creates many unique bookkeeping considerations. For instance, materials are fluid, and prices can fluctuate wildly depending on the job’s requirements. Additionally, unforeseen expenses like worker’s compensation or equipment repair can quickly eat into profitability.
The construction business can also use different accounting methods, such as the completed contract method or completion percentage. In either case, these methods can make the revenue recognition process complex and require more accurate recordkeeping practices. Additionally, tracking costs by project and cost center requires meticulous categorization. Using accounting software designed to manage this type of reporting makes it easier to stay on top of budgets and forecasts.
Keeping Up With Taxes
Construction companies must pay taxes on a per-contract basis. This makes it essential to track costs and revenue on a project-by-project basis. Additionally, many construction companies subcontract work to other small businesses specializing in specific projects. This complicates matters regarding generating P&L statements and accounting for revenue recognition.
The length of construction projects is another factor that makes payment scheduling and collection unique for this industry. Construction projects can be interrupted by weather, regulatory requirements, or other factors outside of a business’s control.
Additionally, construction businesses often have a mobile workforce. They must move workers and equipment between sites, which adds to the cost of operating this type of business. It is essential to have a robust bookkeeping system that can keep track of employee time and expenses, as well as inventory and materials management. This can be done using various methods, including spreadsheets, accounting software, and hard-copy paperwork.
Developing Strategic Plans
Running a construction business is different from running any other kind of company. Shifting costs, increased liability, and a job-centric pricing model make it a unique enterprise that requires specific accounting practices.
For example, contractors can use either the cash primary method or the accrual method for recording revenue and expenses. With the cash-based approach, income recognition only occurs once a vendor pays a bill or deposits money into the company’s bank account. In contrast, with the accrual accounting method, earnings are recognized as a project or contract is completed, and invoices are paid within their respective terms, typically 30 to 90 days, explains Foundation Software.
Additionally, because production occurs simultaneously on multiple projects, construction companies often have to use a particular accounting method called job costing. This type of accounting helps managers and executives track and compare the profitability of projects on a job-by-job basis. It also enables them to choose the most profitable bids for future projects.