Construction Accounting 101: A Basic Guide

Job costing is a method for allocating expenses and revenue to each specific job. Not only will this help you prepare for tax time, but it provides an accurate accounting of profitability for each contract. Your construction bookkeeping company may manage short- and long-term contracts, often with varying end dates. To stay on top of cash flow and keep your books in check, you will need a flexible yet organized construction accounting system.

In the financial manager’s role of custodian of the company’s liquid assets, the manager must ensure that the assets are safe from theft and misappropriation. The financial manager should ensure that, to the extent liquid assets are invested, the company’s owners understand and approve the risk involved. Documentation of the risk management strategy for the treasury function is important to help mitigate and plan for any issues. The financial manager should ensure that general and administrative expenses are reviewed and controlled by management. The financial manager should consider using a budgeting system in which general and administrative expenses are forecast, approved, and compared with actual costs as incurred. The financial manager should ensure that the budgeting system is used properly by the management team.

Long-term Contracts

By reviewing the amounts due on a certain date, you can put together an accurate cash flow projection, showing how much is due each week or month. These amounts should inform your job billings, so you can ensure you are billing enough to cover all your expenses. Most software packages allow you to enter payment due dates for accounts payable invoices. Use these dates to filter your reports so you know how much is due at any one time. Bills that are unpaid — from the time the vendor bills you until you make a payment — are considered your company’s accounts payable.

The construction financial manager’s role may vary from company to company, partly because different financial managers have different skills and personalities. A construction financial manager’s background often indicates the areas in which the manager will concentrate. For example, a construction financial manager whose background is in construction operations initially will concentrate on the proper recording of job costs.

Track retainage owing and paid

Unless the details are put in writing, the job numbering system is partly dependent on the person who designed it. In the absence of written procedures, financial managers may find they have to periodically “reinvent the wheel,” because of uncertainty regarding details of the accounting policies that were used in the past. Construction financial managers sometimes wonder how their duties, responsibilities and relations with others within the organization compare to other construction financial managers. Similarly, construction company owners sometimes wonder what skills are needed and what expectations should be held of their construction financial manager.

• Put simply, job costing is a process that assists contractors estimate and determining the budget and bidding for any new construction project.
• Accounts are grouped into categories that correspond to the structure of a company’s financial statements.
• Employers and others place great trust and confidence in financial managers.
• Contractors are particularly vulnerable to changing costs for materials because it’s difficult to stockpile building supplies in advance.
• Contractors are able to coach their project managers and superintendents in how to supervise costs and production successfully.
• You’ll want to include a description of each transaction, the date of the transaction, and the revenue received.
• The financial reporting policies should be well documented and updated for new accounting pronouncements or new lines of business the company has started.

A project-heavy period could mean you have to employ a larger workforce just to stay on top of project timelines. Any disruption in the supply chain – like the lumber surge in 2021, for example – can result in higher-than-normal material costs and can quickly impact your estimated budgets. Together, these documents are considered an “application” for payment, because the recipient will have a chance to review the schedule of values and either accept or dispute the billed amount. If they disagree, they’ll send back “redlines” so that the contractor can revise and resubmit the AIA billing application. In comparison to other industries, like retail or manufacturing, construction contracting has several distinct traits from an accounting perspective. May include supervision and inspection costs, equipment rental, insurance, etc.

How Jonas Construction Software Can Help You Build the Perfect Chart of Accounts

Unlike overhead expenses, operating expenses result from the normal operations of your construction or service business. Any expense that keeps the business running, beyond direct materials and labor, falls into this group. Operating expenses in the construction industry include rent, wages, utilities, administration expenses, maintenance, and repairs, among others.