Running a contracting company has a lot of moving parts. You’re worried about finding new projects and the progress of your active projects. It might seem like there’s no time to look over financial statements to ensure you’re hitting your revenue and profitability goals.
This is a mistake too many contractors make. They allow busy schedules to take precedence over smart accounting practices and before they know it, their books are out of order and they’re not profiting nearly what they’d hoped.
Having a reliable accounting system is the key to long-term success in the construction industry. At Crewcost, we recommend creating an accounting process with these six critical practices:
Job Costing
Job costing is one of the most important aspects of understanding your business. It’s where you track the costs and revenue of each project to measure your profitability and ensure you’re sticking to the set budget. Through job costing, you can gather valuable data about whether or not your estimates are accurate and your field teams are being productive.
The better you can measure performance and costs at the project level, the more you can control and improve them. If you can’t measure them, you can’t improve them.
Correctly calculating each of these costs is imperative to accurate accounting. For example, if a certain type of project is consistently taking longer than you anticipated and requiring more materials and equipment, then your estimate was likely off. Your job cost report will show you the true costs of the project so you can adjust your estimates in the future and earn your planned profits.
Change Order Management
Changes are an inevitable part of construction projects, which is why change order management is a key accounting practice in this industry. You need a way to track requested changes, estimate the added costs, and have the client agree to the new charges. Without an effective change order management system, you’ll inevitably end up doing work that you never get paid for.
Effective change order systems should track a potential change through its entire lifecycle — from the first time an issue is identified all the way to whether or not a change order was issued. When issues are tracked this way, you’ll always know if the extra costs were captured correctly in your accounting system and if you were paid for that work.
This management system is also key in managing your profits. After making a change, you can assess if you earned enough revenue to offset the cost and still profit from the project. Without a proper tracking and management system, you won’t be able to see how those changes affected your original estimate or if they significantly changed the scope of your project. Both can take you from profitable to just breaking even or losing money on a job if you didn’t adjust your costs correctly.
Construction Labor Costs
One of the easiest ways to drive profitability in your business is to fully build out your labor cost estimates for both individual employees and crews. You can build these estimates into your accounting system so they’re automatically added to your job costing reports and factored in your final bid.
It’s important to remember that labor costs include more than just an employee’s base rate. There are many factors that contribute to your fully burdened labor cost. Things like federal, state and local income taxes, unemployment taxes, employee benefits, company insurance costs, paid time off, and retirement benefits are just a few.
Let our experts teach you how to correctly calculate your fully burdened labor costs.
Once you build out your labor cost structure and start tracking it in your accounting software, your estimates will start getting more accurate. You’ll have a better picture of how your profit margin relies on your labor costs and ways to adjust for that balance. This allows you to perform more profitable work and select only the jobs that will benefit your bottom line.
Bookkeeping
The next aspect of responsible construction accounting is quality bookkeeping. This is a broad term that includes any number of financial practices, but we like to focus on two in particular: invoicing and cash flow management.
More companies go out of business from a lack of cash flow than from missing profits. This is the life blood of any construction company, so you have to ensure you have a reliable system to monitor it. The key is to track your accounts receivable and monitor the status of invoices so you have real-time insights into your cash flow.
Timely invoices — and the process that helps you create and manage them — is vital to both the short-term and long-term health of your business. Proper accounting procedures will show you who’s been billed, if they were billed correctly, how much you’re owed and when you can expect those payments.
You can weigh this information against your upcoming expenses to ensure you have enough money coming into your business to support those costs. If you’re not tracking your invoices and cash flow, you’re flying in the dark and putting your business on the line.
Revenue Recognition
There are four methods you can use to accurately record revenue from a construction job:
- Completed contracts – record income and expenses only after a job is completed
- Percent completion – typically for long-term projects, revenue and expenses are recorded periodically throughout the project (as you complete certain percentages of the job)
- Accrual accounting – record revenue and expenses when a transaction occurs instead of when you make or receive a payment
- Cash-basis accounting – record revenue only when cash is received
The first two options are used in accrual accounting, which is the required method for all businesses with an average of more than $25 million in gross receipts for the prior three taxable years. If you are under that threshold, then you can use cash basis accounting.
It’s important to note that the method you choose can cause differences in your company’s year-end reports because you may not have collected from ongoing projects yet.
The right accounting method paired with a quality system will help keep you on the right track for recording your revenue and reporting those numbers to government agencies like the IRS. (Plus it makes things much easier if you get audited.)
Use Construction Accounting Software
The final way we recommend you improve your accounting process is by using construction-specific software. There are plenty of accounting and bookkeeping services online, but few of them are tailored specifically to the construction industry.
Using purpose-built software helps you keep track of all the niche accounting tasks that come with owning a construction business. Construction accounting software helps you keep track of transactions, implement job costing, automate estimating and look at the total financial health of your business. All in one easy-to-use platform.
Quality software will help you gain better insight into your cash flow, change orders, labor costs, revenue methods and many other aspects that work together to make your business profitable.
Crewcost is a purpose-built construction accounting software that was designed to help your business succeed. Check out some of the advantages of using Crewcost to decide if it’s the right choice for you!