Accounting for Construction 101 Basics

Written by LetsBuild

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Basics of accounting for construction

You may think that you know everything that there is about accounting, but we are fairly sure that you do not realize that the accounting that is done for construction is completely different than any other type.  Therefore, it is necessary for you to learn how to do the accounting for construction correctly right from the start, or you will face major issues for months or years in the future.
One of the first things that you must learn is that hiring an accountant or a bookkeeper as an employee is a great option, as it will free your time up to do the parts of the business that you enjoy the most.  You will have a few items that you will need to pay for every month or year, with other items being necessary on occasion as well.  These items include insurance and training classes that you may need to take to keep yourself up-to-date on laws, safety issues, and even your certifications.  However, there are numerous items that you will need to keep track of for each individual projects and they will differ as much as the projects themselves.
There are two choices that you will find that you have when it comes to how you do your accounting.  You can choose cash accounting, which is normally what people use when they are working on smaller projects.  The income and expenses are all calculated and accounted for as the cash is going from one person to the other and the income is only taxed after all the expenses are deducted.  This is a great system for those who do small remodeling projects, but it will not work well for you if you are concentrating on larger projects.
Accrual accounting is your best option for larger projects, as the income and expenses are all accounted for when they are incurred instead of paid.  You should have a different account for each job that you are working on and they should each reflect the amount of work that has actually been completed on each one.  As you can see, it can take quite a bit of time to keep these types of accounts updated, which is why we recommend hiring a professional to do it for you.
Now, just because you have someone doing all your accounting for you doesn’t mean that you should not be hands on with it as well.  You should take the time to go over the numbers with the accountant to see where improvements can be made, and to ensure that no one is taking money from you.
Of course, you will have plenty of time to know most of these numbers firsthand anyway, because most of them will be within the schedule of values documents that you are preparing for the work that you are doing.  While paper and pencil has been used for years, the new accounting and budgeting online tools make this entire process much easier and faster.  Instead of carrying papers and books with you everywhere that you go, you can simply pull up the info that you need on a tablet, laptop, or even your smartphone wherever you are.

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If you cannot hire a professional accountant or bookkeeper yet, these online tools will make it easy to send invoices, record material costs, and track expenses within seconds from any device.  This will prevent you from missing a deadline or letting things pile up until the task is too large and overwhelming to tackle.
Sending invoices to your clients should occur on a regular basis, so that you always have cash coming in to balance out the money that you have spent on the project that you are working on.  If you do not do this, you will take the chance of losing everything if your client goes bankrupt and cannot afford to reimburse you for everything that you have completed.
Construction is a type of business where the profits or losses are never known for quite some time.  However, you will notice which way it is trending sooner if you utilize the accrual accounting method, because you can see where your profits are in accordance to the amount of work that has been completed already.  A higher profit margin within a low percentage completion rate will almost ensure that you will end up making a profit in the end.  However, if you notice that you are only halfway through a project and you are already seeing a loss, you may need to make some adjustments to keep that loss to a minimum when the project is completed.
Thankfully, past construction jobs can help you become more profitable with future projects, simply because you know how to price everything for a more reliable bid.  You’ll know where to bump up your numbers a little, so that you can see some of the money that you have worked so hard for.