Construction bookkeeping is unique and complex, requiring specific approaches to accurately track costs, handle fluctuating budgets, and manage long project timelines. For contractors, having robust bookkeeping practices helps maintain profitability and control over each project.
This guide covers key aspects of construction bookkeeping, including the role of a construction bookkeeper, recording expenses, and industry-specific accounting methods. By mastering these practices, construction companies can gain better control of their financial performance and reduce inefficiencies in managing costs.
What Does a Construction Bookkeeper Do?
A construction bookkeeper plays a vital role in managing financial data for construction projects. Their responsibilities differ significantly from standard bookkeeping, as they need to account for project-specific variables like labor, materials, and job costing.
Key responsibilities include:
- Tracking Project-Specific Expenses: Bookkeepers track project-related expenses, such as materials, labor, and subcontractor costs, ensuring that all costs align with budget allocations.
- Budgeting and Cash Flow Forecasting: Managing and adjusting budgets is crucial in construction due to variable costs. Bookkeepers continuously update forecasts to ensure projects remain financially viable.
- Payroll and Labor Costs: Construction bookkeepers handle payroll and labor tracking, managing both direct and indirect labor costs within the project budget.
- Generating Financial Reports: Regular financial reports, such as profit and loss statements and cash flow reports, provide insights into a project’s financial health, helping contractors make informed decisions.
| Key Responsibility | Description | Importance |
|---|---|---|
| Expense Tracking | Track materials, labor, and subcontractor expenses | Ensures accuracy in project cost management |
| Budget Forecasting | Adjust budgets based on fluctuating costs | Helps maintain profitability |
| Payroll and Labor Management | Process payroll and track labor hours | Controls labor cost and resource allocation |
| Financial Reporting | Generate profit & loss, balance sheet, cash flow reports | Provides financial transparency |
How to Bookkeep for a Construction Company
Bookkeeping for a construction company involves several key processes to ensure accurate financial management and project profitability. Here’s how to approach it:
1. Set Up Separate Accounts for Each Project
Each construction project varies in scope and cost. By creating separate accounts for each project, bookkeepers can track project-specific expenses and budgets with greater accuracy.
2. Track Labor and Material Costs Separately
Labor and materials are major cost drivers in construction. Tracking these costs separately helps bookkeepers identify discrepancies early and maintain control over the budget. This categorization also provides better visibility into spending patterns.
3. Automate Invoicing and Expense Tracking
Automation reduces manual errors and saves time in construction bookkeeping. Automated systems streamline invoice collection, approval workflows, and expense tracking, allowing bookkeepers to process financial data more efficiently.
4. Manage Change Orders and Adjust Budgets
Change orders often arise during construction, requiring real-time adjustments to project budgets. Bookkeepers must update budgets promptly to account for new costs or savings. Accurate change order tracking ensures financial records reflect the project’s current scope.
5. Generate Regular Financial Reports
Financial reports, such as profit and loss statements and job costing summaries, provide insights into project health. Consistently generating these reports allows contractors to make informed financial decisions and adjust project strategies if needed.
How to Record Construction Expenses
Recording construction expenses accurately is essential for reliable financial records and effective project cost control. Here’s how construction companies can effectively manage expenses:
- Categorize Expenses Using Cost Codes
Assigning cost codes to each expense item—such as labor, materials, and subcontractors—helps bookkeepers keep costs organized and traceable. Cost codes improve budget visibility, making it easier to identify areas with overspending.
- Track Labor and Material Costs Separately
Labor and materials form a significant portion of construction expenses. Accurate tracking of these costs ensures project budgets remain intact and helps identify cost-saving opportunities.
- Maintain Clear Records for Equipment and Overhead Costs
Construction projects often involve high equipment costs and overhead expenses, such as administrative fees and utilities. Keeping detailed records ensures all expenses are accounted for and allocated correctly.
| Expense Type | Examples | Tracking Method |
|---|---|---|
| Labor Costs | Employee wages, subcontractor fees | Tracked through job costing |
| Materials | Concrete, steel, raw materials | Categorized by cost codes |
| Equipment | Rentals, maintenance | Tracked in budget as asset costs |
| Overhead Costs | Utilities, administrative costs | Monthly tracking for operational expenses |
What Type of Bookkeeping is Used in Construction?
Construction accounting commonly uses two primary methods tailored to the unique challenges of the industry:
1. Job Costing
Job costing tracks expenses on a per-project basis, offering a granular view of where costs are incurred. This approach is essential in construction, where each project has unique budgets, timelines, and resource requirements.
| Job Costing Category | Expense Example | Benefit |
|---|---|---|
| Labor | Payroll for on-site teams | Improves visibility into labor costs for each project |
| Materials | Concrete, steel supplies | Tracks materials and prevents budget overruns |
| Equipment | Rentals, heavy machinery | Helps manage and allocate high-cost resources |
| Subcontractor Fees | Electrical, plumbing | Ensures all subcontractor costs are accounted for |
2. Percentage of Completion Accounting
For long-term projects, the percentage of completion method recognizes revenue and expenses based on milestones achieved rather than the project’s completion. This method offers accurate financial reporting and ensures project costs align with revenue generation.
Common Challenges in Construction Bookkeeping and How to Overcome Them
Construction bookkeeping presents unique challenges that can complicate financial management. Understanding these hurdles and how to address them can significantly improve accuracy and efficiency.
1. Managing Fluctuating Costs
One of the most significant challenges in construction is dealing with fluctuating material and labor costs. Market conditions, supply chain disruptions, and seasonal variations can cause unexpected cost increases, making it difficult to stick to budgets.
Solution: Develop a flexible budget that accounts for contingencies. Regularly update project costs and maintain close communication with suppliers to anticipate price changes.
2. Handling Complex Payroll
Construction payroll is more complex than in many other industries, as it involves tracking multiple workers, contractors, and varying pay rates. Additionally, compliance with labor laws and union agreements adds another layer of difficulty.
Solution: Use payroll management tools to track hours and automate wage calculations. Ensure accurate classification of employees and subcontractors to comply with tax laws and avoid penalties.
3. Tracking Costs Across Multiple Projects
For contractors managing several projects simultaneously, tracking costs and ensuring profitability for each one can be overwhelming. Overlaps in labor, equipment, and material usage further complicate bookkeeping.
Solution: Implement project-based accounting systems. Assign unique cost codes for each project and ensure expenses are allocated correctly. Review job costing reports regularly to monitor individual project performance.
4. Inconsistent Financial Reporting
Without consistent financial reports, it’s challenging to understand project profitability and make informed decisions. Manual reporting methods are time-consuming and prone to errors, resulting in inaccurate data.
Solution: Automate financial reporting processes. Generate profit and loss statements, cash flow analyses, and variance reports regularly to gain real-time insights into financial performance.
5. Compliance with Tax and Legal Requirements
Construction companies often face complex tax regulations, especially when operating across multiple jurisdictions. Failing to comply with these requirements can result in audits and penalties.
Solution: Work closely with a tax professional or CPA familiar with the construction industry. Ensure your bookkeeping processes include detailed record-keeping to streamline tax preparation.
| Challenge | Impact | Solution |
|---|---|---|
| Fluctuating Costs | Overruns and reduced profitability | Flexible budgeting and supplier communication |
| Complex Payroll | Errors in pay or tax compliance issues | Automate payroll management |
| Multi-Project Cost Tracking | Misallocation of expenses | Project-based accounting systems |
| Inconsistent Reporting | Poor decision-making | Automated and regular financial reports |
| Tax and Legal Compliance | Risk of penalties and audits | Detailed record-keeping and expert advice |
By addressing these challenges proactively, construction companies can streamline their bookkeeping processes and focus more on delivering successful projects.
How Planyard Simplifies Bookkeeping for Construction Companies
Planyard is designed to address the unique challenges of construction bookkeeping, offering tools to streamline processes and improve financial management. Here's how Planyard supports construction companies:
- Automated Invoicing and Expense Tracking: Planyard reduces manual data entry by automating the process of collecting and approving invoices. This ensures all expenses align with project budgets.
- Real-Time Budget Updates: Planyard provides live budget updates, reflecting changes instantly to keep financial data accurate and up-to-date.
- Job Costing and Project-Based Financial Management: Planyard allows companies to manage costs per project, ensuring each project’s financial health is tracked effectively.
- Integrated Reporting: Generate comprehensive reports like profit and loss statements, cash flow forecasts, and budget variances, giving clear insights into project performance.
- Seamless Integration: Planyard integrates with accounting software like QuickBooks and Xero, simplifying the flow of financial data across platforms.
Conclusion
Construction bookkeeping is critical for tracking finances, maintaining project profitability, and making informed decisions. By implementing effective bookkeeping practices, construction companies can gain better control over their budgets and ensure projects contribute positively to their bottom line.
Tools like Planyard simplify the process by automating routine tasks, providing real-time financial visibility, and integrating with existing accounting software. Embrace streamlined bookkeeping practices to improve efficiency and ensure financial success in your construction projects.