Construction Accounting 101: Expert Guide for Contractors

No matter what industry your business is in, from construction to catering, good accounting gives you the data your business needs to make better decisions. Construction is an unconventional industry, with a unique business structure. Union contractors face a similar situation as prevailing-wage contractors. Where certified payroll typically tracks wage and fringe obligations for government agencies, union payroll needs to track and report wage and fringe obligations to the union local. With unit price, risk tends to be shared between the contractor and customer, since production quantities can end up higher than estimated.

Depending on the company, this might include short-term assets, such as cash and accounts receivable, or long-term assets such as property, plant, and equipment (PP&E). Likewise, its liabilities may include short-term obligations such as accounts payable and wages payable, or long-term liabilities such as bank loans and other debt obligations. This is especially helpful when trying to stay on top of your financial records.

Construction Contracts and Bookkeeping

It’s essential that contractors have an effective method for keeping track of income and expenses, and for reconciling every transaction. If your small business has less than five employees, you can use the free version of NCH for your accounting software. The free version lacks some of the bigger features suitable for larger enterprises, but still has much to offer. Examples of financial statements you can generate include income statements, balance sheets, profit and loss (P&L) statements and sales analysis by item, customer and salesperson.

We’ll dive into each of these to see the foundation contractors need for running a successful construction business. But first, let’s look at what makes construction different from so many other industries. With the steps in this guide, you have everything you need to do construction accounting for your company the right way. Plus, you’ll have all the tools you need to stay on top of your construction accounting and make smarter financial decisions.

Learn How to Run the Accounting for Your Construction Business at Botkeeper

The overall transaction price in the contract is determined and then allocated among the performance obligations. Contract price might simply be a fixed price, or it may include agreed-on variable compensation, such as incentives, discounts or change orders. Allocation of the total transaction price to the various performance obligations is based on estimates of standalone pricing for each obligation.

• Perhaps you need to re-evaluate your production rates when estimating projects.
• Examples of financial statements you can generate include income statements, balance sheets, profit and loss (P&L) statements and sales analysis by item, customer and salesperson.
• These added facets make construction accounting different and require special processes.
• A contracting business that is working with a growing number of customers might want to think bigger and go digital.
• Inventory refers to any goods available for sale, valued at the lower of the cost or market price.
• Each transaction should match up between your books and your statements.

Accrual accounting, on the other hand, records income when you earned it, regardless of when the cash actually changes hands. It involves comparing your bank statements to your bookkeeping records. Each transaction should match up between your books and your statements. It is usually done each month so that you can catch any errors quickly.

Step 3: Reconcile your bank accounts

Total equity is calculated as the sum of net income, retained earnings, owner contributions, and share of stock issued. Some companies issue preferred stock, which will be listed separately from common stock under this section. Preferred stock is assigned an arbitrary par value that has no bearing on the market value of the shares. The common stock and preferred stock accounts are calculated by multiplying the par value by the number of shares issued. Retained earnings are the net earnings a company either reinvests in the business or uses to pay off debt.

These relationships can be beneficial between companies, but they complicate the financial accounts, as the primary company now has to track their own spending as well as the subcontractor’s. If a company takes out a five-year, $4,000 loan from a bank, its assets will increase by $4,000. Its liabilities (specifically, the long-term debt account) will also increase by $4,000, https://www.newsbreak.com/@cnn-edits-1668599/3002242453910-cash-flow-management-rules-in-the-construction-industry-best-practices-to-keep-your-business-afloat balancing the two sides of the equation. If the company takes $8,000 from investors, its assets will increase by that amount, as will its shareholder equity. All revenues the company generates in excess of its expenses will go into the shareholder equity account. These revenues will be balanced on the assets side, appearing as cash, investments, inventory, or other assets.

Construction Contracts: What Does “Workmanlike Manner” Mean?

The high price and length of construction projects make payment scheduling and collection unique. Indirect costs are those which are essential to running your business across projects. Examples include repairs to equipment, insurance, transportation, and software.