It may sound like small potatoes, but “bookkeeping” and “accounting” don’t mean the same thing. Both are important parts of running a healthy construction company, but each serves a distinct function. Construction bookkeeping is all about recording daily financial transaction data, maintaining your general ledger, and closing the books each month. On the other hand, accounting focuses on analyzing and interpreting that data to make smarter business decisions. Bookkeeping is small-picture, while accounting is big-picture - but there’s nothing ‘small’ about the impact good bookkeeping has on the financial health of your business.
A lot of construction resources out there only focus on the accounting side of things, which makes it tougher for contractors to learn the bookkeeping basics they need to support their growth. To help close the gap, I’m sharing the biggest pitfalls I see contractors run into when it comes to bookkeeping, and how to move past them.
Key Takeaways
- Because every individual construction contract is different, every job you take on needs to have a separate profit and loss statement, and should be tracked down to the accounting code level of detail.
- Accuracy is everything, and a few duplicate or missing transactions can heavily skew your financial data. A strong data reconciliation (or validation) process will ensure there are no duplicate transactions in your bookkeeping system.
- Don’t feel like you have to go it alone when it comes to bookkeeping. Look for dedicated construction bookkeeping services that can help you better understand your financial health and improve your decision-making.
What Makes Construction Bookkeeping Different?
Picture your average sandwich shop. In terms of finances, they’re pretty much concerned with just two things:
- How much are we spending on ingredients?
- How many sandwiches are we selling?
They don’t have much of a reason to worry whether or not the turkey sandwich is outperforming the BLT, simply because there’s not a lot of difference in profitability between the two.
Construction is completely different. Unlike your average small business owner, contractors have to keep close track of every single project they take on. This is because no two construction projects are the same, and there’s a broad spectrum of project profitability. Every job not only needs its own profit and loss (P&L) statement, but has to be tracked down to the specific accounting code level. For example, if you lost money on framing, you need to know that when you estimate your next project.
Another big difference between normal bookkeeping and construction bookkeeping is the amount of large customer deposits you’re going to see on your P&L, especially when you’re starting a new project. It might look like you’ve had an incredibly profitable month because you’ve invoiced your client to get a project started, but that’s not the full picture. When you recognize that this is a deposit and not income, your overall profitability for the month looks a lot different. If you don’t know how to manage these large deposits, you can wind up in the red before a project even gets off its feet.
Common Pitfalls Construction Companies Run Into With Bookkeeping
Most bookkeeping issues I see construction business owners run into fall into one of these four categories:
Flying Blind
You got into the construction industry to build things, not be an accountant. The problem is, construction is so complex that you need at least a bit of background knowledge on how to navigate the bookkeeping process. You might be managing an entire development, but if your only source of financial truth is your P&L, it doesn’t mean you understand what goes into putting it together.
Now you’re stuck in a position where you have to hire and manage someone to handle your bookkeeping needs. Worst-case scenario, you find someone who can work their way around QuickBooks but doesn’t actually know the nuances of construction bookkeeping (and you don’t know the difference).
Ghost Transactions
Duplicate transactions and transactions that never actually occurred are more common than you think, especially when you’re using basic bookkeeping software. Here’s a common example I see: You’re sending a check for John the plumber for an invoice he sent. But then, John calls and says the invoice he sent you wasn’t right - he forgot to include a change order. He sends you another invoice, you write another check for that. Now there are two checks in your bookkeeping system.
One of these checks is never going to clear your bank account. You might have ripped it up and thrown it in the trash, but it’s still in your accounting software as a duplicate cost. This is why a good data validation, or reconciliation process, is so important. Without a monthly reconciliations system, you have no idea which transactions are real, and which aren’t.
Confuse P&L and Bank Statements
I see a lot of contractors confuse their P&L with their bank statements. They look at their profit and loss statement and think they’re doing great because it says they made x amount of money this year, but they don’t see that amount in their bank account. What happened?
The thing is, whatever doesn’t hit your P&L (for example, the principal part of a loan payment), goes on your balance sheet. If you pay yourself through a draw instead of having an S corp election, this also hits the balance sheet as equity. Think of it like you’re just taking a dividend from a stock. Ultimately, this just means there are lots of opportunities for money to leave your bank account, but not show up on your P&L. It's normal for people to look at their profit and loss statement and think that it should tell them how much money came in and how much money came out, but that's not the case. You need to look at both of these pieces of financial data to get the true picture of what you're dealing with.
The Mirage of Cash
Like I mentioned earlier, tracking your cash flow and how money in the bank is actually yours is harder than it seems. Every contractor has to be able to answer the question, “How much of the money in my bank account is actually mine?” You might see $300k in your checking account, but how much of that is for your credit cards, owed to vendors, or client’s money you plan to spend later on their project? Once you add all that up, you might actually be looking at a negative amount.
7 Bookkeeping Tips for A Healthy Construction Business
Whether you decide to outsource your bookkeeping or keep it in-house, here’s my advice on how to keep accurate financial records and maintain healthy books.
1. Track Expenses by Job
All of your expenses should be tracked down to the job level. This goes back to the idea that each individual project should have a P&L statement. The more visibility you have into exactly what expenses are occurring where, the easier it becomes to adjust that spending as needed.
2. Keep your Chart of Accounts Simple
I see a lot of contractors tempted to add every little accounting code to their Chart of Accounts, but it’s really not designed for that level of detail. Instead, categorize the financial information in your COA into buckets like labor costs materials, subcontractors, etc. By keeping it simple, you won’t have to scroll several pages down on your P&L to get meaningful information.
3. Reconcile Monthly
Like I mentioned before, the data validation process is one where a lot of contractors can get tripped up, especially when it comes to those “ghost” transactions. Implement a monthly reconciliation process you can lean on to keep these ghost transactions at bay. Your data validation process might be as simple as looking through your financial statements, credit card statements, etc. and confirming that either a) you have them and they’re recorded or b) any that didn’t actually happen have been deleted from your bookkeeping software.
4. Separate Your Expenses
Essentially, don’t use your business credit card to get a gift for your spouse. By keeping your personal and business expenses separated into different accounts, you’re protected from “piercing the corporate veil” if your company is sued. This is when a court decides that, despite the fact you have an LLC, your business is not a separate entity, which means that your personal assets can be used to satisfy your business debts and liabilities.
5. Plan for Taxes All Year
Proactive tax preparation is the way to go in construction. Every month, take a moment to set aside 20-30% of your net income in a separate bank account. This way, you’ll already have a decent idea of what your tax return to the IRS will look like, and you won’t have to go scrounging for cash at the end of tax season. If you’re not clear on what revenue recognition for tax purposes should look like for your company, check out this guide.
👉 Check out this full guide to revenue recognition in construction.
6. Use Construction Accounting Software
A good construction accounting software will help take most of the guesswork out of construction bookkeeping. Look for a software like CrewCost that can not only streamline basic bookkeeping, but:
- Handle job costing
- Automate financial reports
- Provide real-time visibility into how every project cost impacts budget
- Know When to Call the Pros
Bookkeeping for construction companies isn’t easy. Don’t be afraid to hire someone to handle your bookkeeping services. A word of caution though: Not every Main St. CPA knows their way around a balance sheet. Look for construction-specific accounting services that actually work with folks in the industry. One good solution is to hire a fractional controller who can come in once a month to clean up your data, move things around, and tell you exactly how you’re doing.
Wrapping Up
If you want to build a solid financial foundation for your construction company, take some time to learn the basics of construction bookkeeping. You don’t need an accounting degree - just a few changes here and there can take your financial management light years ahead.
At TruBalance Accounting, we can help you get started. Get in touch with us today and gain a new level of control over your finances.