Construction accounting 101: An expert guide for contractors

And your clients and competition require you to evolve and strategize for the near and distant future. Your IT network is the backbone of your company, providing you with quick access to vital information about any given job—whether you’re in the office or on site. We have the construction transition planning knowledge to help contractors prepare for an expected (or unexpected) transfer of ownership. By drafting a written plan documenting the steps to be taken when the time comes, you and your team will have peace of mind knowing that nothing is left to chance. “[James Moore] understands that as a business owner, there are many things I don’t have time for. They’ve allowed me the ability to focus on managed, steady growth and concentrate on the business of making money.”

However, although construction accounting is built on standard accounting principles, it is a specialty due to construction companies’ unique way of working. This financial tool measures how well accountant for contractor a construction company manages and generates cash to pay its debt and fund operating expenses. Sometimes, the cash balance report stems from the profit and loss report from the previous segment.

What are the business expense categories?

Standard accounting is great for many businesses, but most construction firms need something more robust. Most businesses simply record the cost of the products sold, but construction companies are quite different. Each job incurs direct and indirect costs that may fall into a wide range of categories.

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• 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.
• On top of distinct project requirements, construction also features long and often seasonal production cycles.
• Just as you have project managers overseeing each job site, it might make sense to hire a professional accountant to help you reconcile a variety of transactions for various jobs and services.

Unions place specific requirements on pay rates and deductions for things like union dues and fringe benefits like pension and health insurance payments. Depending on the union, deductions can also include things like political contributions and annuity funds. You will want to ensure you comply with union requirements when preparing your payroll. There are also many fringe benefits that construction workers are entitled to, including health insurance, vacation pay and retirement benefits. Along with wages, this information is reported on W-2s and 1099s for your employees and subcontractors at the end of the year.

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That means we’re constantly working to increase our knowledge and the level of service you receive. After all, your finances are the foundation of your business because they affect every other aspect—from day-to-day operations to future plans for growth and transition. If you build on a weak foundation, your future plans may come crumbling down.

While industry knowledge is important, it takes more than technical skills to create a relationship and provide value beyond what’s expected. It takes commitment and the willingness to invest the time to build understanding and trust. It is important that the accountant build a relationship, or at least have an open line of communication, with the contractor’s lender or bonding agent.

Best Practices for Construction Bookkeeping

What’s more, accounting for construction company finances has some unique challenges compared to other types of businesses. Contractors are not paid through a company’s payroll system, because the company is not the contractor’s employer. Instead, a contractor is set up in the company’s accounts payable system as a separate vendor, and paid in accordance with the payment terms agreed upon by the two parties. Apart from multiple prevailing wage and union rates, contractors commonly deal with multiple rates for numerous other reasons. Working on jobsites in multiple cities and states, employees may have multiple tax withholdings, all within a single payroll.

Understanding each contract type and knowing which projects call for a certain type of contract will help construction businesses keep track of their costs and revenue more accurately. One potential downside of the accrual method is that businesses can pay income tax on unrealized profit since the accounting system can record revenues that have not yet been received. One way to mitigate this problem is to structure contracts with the profit evenly distributed rather than front-loaded. Job costing is a form of project-based accounting that helps construction companies keep track of the expenses for a specific job or project. On top of that, construction is a notoriously volatile industry with a high failure rate, slow time to payment, and inconsistent cash flow. Get an all-in-one solution to manage your finances and gain accurate insights into your business’s financial performance.

Kelsey is a seasoned content marketer with a wealth of experience in the construction and engineering industries. Kelsey joined Deltek in 2022 and has honed a deep understanding of construction industry trends, driving impactful content strategies and enhancing brand visibility. Having field applications and cloud technologies that enable your workforce to do their job on the go and from multiple locations is important for all construction firms. Let our team of on-demand CPAs handle your accounting and technology, so you have more time to focus on what you are best at – running and growing your company. For example, a typical business, such as a retail store, buys inventory and sells merchandise from a fixed location, so it’s easy to understand the cost of each item sold and keep overhead relatively constant.