Maintaining accurate financial records prevents costly mistakes that could impact profitability. It also helps companies stay compliant with regulations and tax laws. Construction businesses typically use multiple accounting methods to manage their finances better. Each method comes with its unique benefits and drawbacks. Cash accounting is the most straightforward, but it limits proactive planning.
Accuracy
Running a construction company is different from running other goods or services businesses. Shifting costs, increased liability, and a job-centric pricing model create unique challenges requiring a different accounting approach. Tracking inventory and materials can be difficult with varying job sizes, overtime, and an often mobile workforce. Many contractors also have to deal with a high level of complexity regarding payroll, including union requirements and deductions for things like health care and pensions.
For these reasons, bookkeeping for construction companies emphasizes accuracy as a key element of good financial management. Using a robust system to record and track jobs helps companies gain a real-world understanding of costs to develop accurate estimates, project budgets, and profit margins. Management can then analyze past job ledgers to create a powerful cycle of accurate data that leads to more effective bidding, estimating, and decision-making.
Taxes
One of the best things a contractor can do for their business is to keep excellent records and ensure they meet IRS guidelines. The IRS allows for a wide variety of deductions for construction businesses. For example, if a contractor has a separate phone line for work-related calls, they can deduct the cost of that service. Any costs associated with the company’s vehicles – including gas, oil changes, repairs, and insurance – are also deductible. Other deductible expenses include tools like drills, saws, wheelbarrows, and union fees. In addition, since construction production is largely project-based, contractors can choose from several accounting methods to recognize income and expenses. These methods include cash-basis, completed contract method (CCM), and completion percentage. These options vary in when revenue and expenses “count” but can save companies substantial tax dollars if they meet certain IRS guidelines.
Cash Flow
Contractors are primarily project-oriented, which means construction cash flow is a constant concern. Unlike retail and manufacturing, where equipment use and labor costs occur in one location and are fairly consistent, construction production occurs on multiple sites, with varying labor rates and prices. This can create a variety of unique financial challenges that are difficult to manage.
Accounting software that syncs clients, items, expenses, payments, and invoices can help keep the books in real time. This helps contractors see what is happening on projects, allowing them to create accurate projections and forecasts that are more realistic throughout the project delivery period.
Profitability
Profitability is a critical measure of a construction company’s overall health and viability. This is because profit provides the financial cushion needed to cover fixed expenses, like overhead costs, and to invest in the business.
Contractors can choose from a few different accounting methods, such as the cash method (recognizing revenue only when you receive payment) and completed contract accounting (recognizing revenue and recording expenses only after the project is complete). However, these methods come with several limitations that make it difficult for contractors to track costs and profits accurately. Inaccurate estimating, underbilling, and misallocating expenses are all common mistakes in construction bookkeeping that can lead to costly consequences for contractors. To maximize profitability, contractors must set goals and develop reliable systems supporting their achievement.
