Best Practices for Construction Bookkeeping

Without high-quality bookkeeping, it’s impossible for business owners to make decisions with a high degree of confidence. Bookkeeping drives the flow of financial information in a business, and in construction companies, it’s especially important.

In construction accounting , costs drive revenue. So it stands to reason that recording and coding all costs, from labor to materials, in a timely and precise manner should be a task of paramount importance to construction company owners. But all too often, that’s not the case.

In the construction industry, effective bookkeeping demands that companies take an approach tailored to the industry’s accounting standards. As we’ll explain in this article, there are several best practices of construction bookkeeping that when adopted, create a much stronger accounting and finance infrastructure in construction companies. That helps businesses secure construction bonding , manage complex projects and plan for future growth.

5 Construction Bookkeeping Best Practices

Bookkeeping for construction companies shares many similarities with the bookkeeping process at other companies. Reconciling bank statements and categorizing business expenses are routine bookkeeping tasks, regardless of the industry. But in construction bookkeeping, there are several key distinctions to be aware of. Perhaps the most significant of these is that in large-scale construction projects, costs drive revenues.

Construction accounting uses percent-complete accounting, meaning that a construction company recognizes revenue as it records costs. Let’s say a construction company has recorded $4 million of the costs it budgeted for a $5 million project. The project is considered 80% complete, and the company should bill 80% of the total contract value to its client.

Obtaining accurate job costing information, and incorporating this into the bookkeeping process, comes with its own challenges. Many construction company owners have yet to realize the importance of accounting and bookkeeping. The transmission of information from the job site to bookkeeping staff may be inconsistent — or in some cases, downright wrong.

Navigating these challenges demands that construction companies adopt the bookkeeping best practices outlined below. These practices don’t just make for more accurate financial reporting; they’ll also help unlock operational efficiencies in your business.

1. Use Job Costing

Effective job costing is crucial to the reliability of your construction business’s books. It ensures costs are allocated correctly between the different projects your business is working on at a given point in time.

Ideally, job costing should be done at the individual item level. Here’s a simplified example of how it works:

Let’s say your construction company bought 1,000 screws: 500 for Job A, 300 for Job B and 200 for Job C. For simplicity’s sake, we’ll say your screws cost $100, or $0.10 each.

Using job costing, your bookkeeper would assign the costs associated with your $100 screw order across the three jobs, assigning $50 to Job A, $30 to B and $20 to C. This ensures you can more accurately understand the profitability of each project and bill your clients according to the costs you have incurred.

Job costing should be used for all expenses, including materials, labor and even overhead expenses (which should be allocated between jobs using a consistent formula).

2. Build the Right Systems and Accounting Infrastructure

Creating a repeatable, reliable process that leverages automation technologies is key to effective job costing (and by extension, robust bookkeeping). It’s not realistic to expect your bookkeepers to manually categorize every screw your company uses as part of a project. Instead, you need to create a system that supports this process.

Many large, well-developed construction companies use highly specialized construction accounting software that can automate large swathes of this process. However, these software platforms can easily cost $100,000+ a year, meaning they’re out of reach for many growing companies. That’s why many companies work with a specialized construction CPA to create accounting processes and infrastructure that run on more affordable platforms like Quickbooks.

This approach, coupled with reliable bookkeepers that stay on top of coding invoices, brings significant efficiencies to your accounting process. Invoices can be generated at the same time costs are recorded, shortening cash cycles and resulting in a more efficient accounting environment.

3. Maintain the Work In Progress (WIP) Schedule

In many companies, bookkeepers are tasked with supporting the preparation of three key financial statements on a monthly basis: an income statement, a balance sheet and a cash flow statement. Construction companies bound by GAAP produce these three statements, but they typically also produce one additional statement: the WIP schedule.

The WIP Wo tracks the expenses and revenue of every project, displaying the progress and profitability of every job the construction company is working on. Advanced construction software platforms produce real-time WIP schedules that update as expenses are incurred. But for most companies, a monthly WIP schedule is sufficient.

WIP schedules aren’t just internal financial management tools; they’re also important to the surety company that’s bonding your construction work. Producing accurate financial statements on a routine basis is crucial in keeping these partners informed on project progress.

4. Hold Project Managers Accountable

Your construction company’s bookkeepers don’t operate in a vacuum. Their success depends on the reliable flow of information from the field to head office. Because your bookkeepers are rarely on site, the project manager on each job site must reliably relay accounting information to them.

This can often be a challenge. Project managers might not understand the value of constantly sending invoices and job site updates to bookkeepers. However, this flow of information is central to reliable accounting. As the owner of the company, it’s your job to both create the processes and hold your project managers accountable for transmitting financial information to bookkeepers. Consider hosting monthly meetings with the entire management team to provide project managers and accounting managers with a venue to share information and maintain updated job cost estimates.

5. Support and Upskill Bookkeepers with a Specialized Accounting Firm

Bookkeeping might be an entry-level role, but the skill of your bookkeeping staff is foundational to your company’s financial strength. And because bookkeeping for construction companies is different from bookkeeping for companies in other industries, investing in training and guidance for your bookkeeping staff can be invaluable.

A specialized construction accounting firm like James Moore is well-equipped to help educate your bookkeeping staff in the intricacies of construction bookkeeping. Our experienced construction accounting professionals regularly advise construction companies on the setup of their accounting infrastructure and processes. We also train our clients’ bookkeeping teams and are available to provide ongoing support through our outsourced accounting services.

James Moore: Specialized Construction CPAs and Advisors

Robust bookkeeping is central to the financial success of your construction company. So it’s vital that your company takes an approach that’s tailored to construction accounting standards.

Creating an environment where your bookkeepers can follow the best practices outlined above is an investment that will pay dividends for years to come. Doing so streamlines access to financial information and strengthens your ability to make decisions.

At James Moore, our construction accounting CPAs bring decades of experience advising construction companies throughout Florida on the Southeast on all aspects of accounting, bookkeeping and financial management. We provide outsourced accounting services tailored to the needs of construction companies, as well as a wide range of assurance, advisory and tax planning services that help you build a better future for your company.

To learn more about how James Moore can support the accounting and bookkeeping needs of your construction business, contact an advisor today.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.