5 Steps for Simplifying Your Bookkeeping as a Construction Company

Mar 31, 2023

Like many small business leaders, construction company owners often have to wrestle with the ever-looming beast that is bookkeeping and accounting. Not only that, but bookkeeping for contractors tends to work differently than your typical accounting and bookkeeping services. It’s complex and can make virtual bookkeeping more difficult the more jobs construction companies undertake.

Though it may be complex for owners to conduct with ease, accounting for construction companies enables leaders to have a better understanding of their financial situation through tracking and recording both expenses and incoming payments. It also helps organizational stakeholders better understand where money’s going, where it’s coming from, and how well their organization is meeting its goals.

Bookkeeping for contractors, while challenging, is an essential part of running a construction company. You’ll need to find a way to manage your company’s bookkeeping if you want to accurately understand your path toward financial success. To keep things simple, we’ve covered the basics on accounting for contractors and five steps you can take as a construction business owner to successfully wrangle your contractor accounting.

How Does Accounting for Construction Companies Work?

Many construction companies, especially smaller home builders and contractors, work with a small team of generalists who tend to undertake a variety of roles within the organization. It can be difficult to manage the accounting and bookkeeping tasks when a company is built on the core principle that more work = more money. Between overseeing multiple projects, managing client expectations, and navigating it all with your team, even the most financially-savvy contractors can struggle to balance their books. 

Given the complexities of construction accounting and the other labor-intensive demands of a home building or renovation project, construction companies require easy-to-use contractor accounting tools that can simplify and streamline the process. Though accounting for construction companies can be complex, companies who follow an organized process each time they take on a new project tend to have the most success in financial record keeping.

Why is Bookkeeping for Contractors Unique?

Contractor accounting reflects that construction, as an industry, has a lot of different components that need to work together to accomplish its goals. It’s not only difficult to track revenue and costs on a single project, it becomes much more difficult to track that for multiple, disparate projects as well. The decentralized nature of the industry makes bookkeeping for contractors unique; no two projects are the same. The more projects your construction company manages and the more workers you contract, the more important it is to have your accounts in order.

Also, construction company owners need to be mindful about tracking their costs. You need to record all costs if you want to track and spend efficiently. So regardless of whether you’re dealing with direct costs or indirect costs, you need to be on it with cost tracking in your virtual bookkeeping.

Next, the price and length of construction projects make payment scheduling and collection unique. Across a variety of markets, contractors get paid upon delivery of a product or service. However, construction projects tend to have much lengthier timelines. It can take months or even years to complete a job as a construction company. Not only that, but project costs can vary according to the weather, the season, or economic conditions, as do the cost of materials and strain on workers and equipment. So no two jobs are alike, making intentional contractor accounting essential for accurately conveying the financial wellbeing of your construction company.

5 Steps for Simplifying Your Accounting and Bookkeeping Services as a Construction Company

So, accounting for construction companies is unique and can be challenging for construction company owners to manage if they aren’t organized in their approach. As such, we’ve compiled five steps you can take for simplifying your accounting and bookkeeping services as a construction company. Here’s a brief overview of these five steps:

  1. Keep your financial records of payments as detailed as you can.
  2. Use multiple accounts for payments and jobs.
  3. Use job costing to your advantage to cut down time spent determining labor, materials, and costs.
  4. Choose a revenue recognition method that best reflects your organization and its successes.
  5. Automate your bookkeeping and accounting services to cut down on a lot of time and energy you could spend elsewhere.

Let’s cover each of these steps in more detail below. 

Keep Your Records On Payments Detailed

The nature of the construction industry is that your organization is responsible for managing a varying number of projects that can each take months to years to complete. Tracking detailed payment information is perhaps the first great step you can take in conquering your contractor accounting.

Apart from giving you insight into where your money is going, detailed receipts serve as proof of your business expenses in case you ever get audited. Note down all the information from your receipts and invoices in case you ever need it. You can do this manually or by using a virtual bookkeeping software.

Be mindful of the following if you choose to do this manually:

  • Accounts payable. Be sure to include items like rent, utilities, equipment, and insurance here. This is where your construction company’s bills go.
  • Accounts receivable. This is where you’ll record payments from clients. Entries should include the date, the client’s name, the amount, and any outstanding balance on a contract retainage.
  • Job costs. Track items such as payroll, subcontractor payments, and material purchases separate from your accounts payable.

You should keep all three of these updated regularly to know how your business is doing, as well as prepare for a potential audit. For more information on when you should close your books, read our article on the exploration of account reconciliations.

Use Multiple Accounts

Next, you should be using multiple bank accounts to simplify your contractor accounting. In short, it’s hard to understand how you’re doing financially if you keep all your company’s money in a single bank account. The nature of accounting for construction companies works differently than most other industries. It’s more difficult to understand how you’re doing financially because all the money in the bank account might not necessarily be yours. For example, some of that money needs to be used for payroll, covering expenses, and paying taxes.

Having multiple bank accounts can help you in your quest to simplify accounting for construction companies. You could have one account reserved for paying expenses, another one for managing payroll, and a third one for receiving payments for clients. Doing so will help you get a better idea of how much money is coming in and going out of your business every month. It makes it easier for you to stay on top of bookkeeping for contractors.

Use Job Costing to Your Advantage

As stated before, job costing is a unique challenge that can be used to your advantage to cut down time spent on jobs and on accounting for construction companies. 

Whether you decide to do your job costing manually or by using a virtual bookkeeping software, the same steps apply. First, break down the project into phases, and then list all the tasks needed to complete each phase. Once you create a list of tasks, divide these into three expense categories: Labor, Overhead, or Materials.

You should also add your income and expenses from each project into a general ledger to get an accurate overview of your gross and net income. Think back to that first step of keeping your records as detailed as possible. 

The more adept you are at efficiently doing your job costing, the better you can become at understanding your revenue and expenses. Doing so enhances your contractor accounting skill set and makes taking on new projects more advantageous.

Choose the Right Revenue Recognition Method for You

Revenue recognition is the process of officially recording how and when your business generates revenue. There are a number of different revenue recognition methods you can use, like the completed contract method, the percentage of completion method, or the installment method.

Take time to research the right revenue recognition method for your business. This’ll influence how you do your accounting and bookkeeping services. It’ll also help you know when to record payments and keep track of your books effectively.

Automate Your Accounting and Bookkeeping Services

Last but not least, you can simplify your accounting for construction companies simply by automating your accounting and bookkeeping services. Contractor accounting is complex and unique, so working either with a business growth specialist or using a virtual bookkeeping software will cut down on a lot of time and energy. 

We have an article that dives into the different accounting software you can select from to address your needs.

4Corner Business Financial Consulting Services in Denver, CO

Well, that’s all folks. Sounds simple enough to do, right? 

We know that accounting for construction companies is always going to be more complex and unique than other industries. That’s why 4Corner Business Service's team of experienced accounting and small business consulting experts provide you with the tools and financial information you need to make critical business decisions as the owner of a construction company. 

Allow us to be the experts on bookkeeping for contractors for your Denver, CO construction company. In addition to bookkeeping for small and large businesses, 4Corner offers payroll help, support in choosing and using accounting software, professional tax services, and valuable financial advice to guide decision making. We help businesses both large and small implement proven growth strategies so you can turn our small business consulting services into revenue successes. 

We’ll take the guesswork out of contractor accounting so you can tackle more projects. If you have any additional questions, feel free to contact us at 4Corner Business Services. You can set up a meeting with Phil Zavala, founder of 4Corner, to get you on the right track.  


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