Construction accounting differs greatly from general accounting. Your projects involve a lot of moving parts. As such, accounting for the costs and expenses associated with projects that may go through change-order after change-order, stretching over several months or even years, takes special skills. Whether you’re a general contractor or specialize in a certain area of construction, these accounting tips will help you gain a clear understanding of your business finances.
1. Choosing the Best Projects
The lure of the mighty dollar can be hard to resist. You are thinking about submitting a bid for the biggest project you’ve ever tackled for the most money you’ve ever made. Before you say yes, are you sure this is the best project for you?
Weighing the Costs
Can you cover the costs of the proposed project? What about the risk factors associated with the project? Will you need to rent equipment, hire more workers, and front more expenses? Before you choose a project, create a simple profit-loss spreadsheet and calculate the additional costs and risks associated —especially with bigger projects— to make sure you’ll come out ahead.
2. Making More Effective Quotes
If you take them time to calculate the feasibility of taking on a project, you will be able to provide better, more effective quotes. Here are several cost comparison methods contractors use to provide effective quotes.
Methods of Cost Comparison
Cost Comparison: The cost of materials, permitting, licensing, and general expenditures is going to vary from job to job. When calculating costs to include in a quote, be sure to include cost comparisons with previous or similar jobs for an accurate picture of the costs.
Work Comparison: How long and how many workers it will take to complete the job should factor into your quotes to make them more effective. Consider if hiring more people will change those numbers at all and be as transparent as possible.
Cost Accrual: You may eat the costs up front and bill the customer on the backend for additional labor and materials instead of charging those up front; a good method for winning bids. You will still be reimbursed but you must be sure to accrue your costs so that you don’t shortchange yourself at the close of the project.
Methods of Calculating Billing Milestones
Completion Percentage: Your method of billing should also be spelled out in your quotes to make them more effective. One method is to set up milestones where you are paid a percentage of the total for a certain percentage of work that has been completed to-date. You can set these up for weekly, bi-weekly, monthly, and quarterly milestone payments.
Contract Completion: Another, more risky method, is to do all of the work, eat all of the expense, and then bill your client at the completion of the contract. If you choose this method, it’s wise to insist on a deposit so that you aren’t completely shafted after the work is completed.
Cash Payment: It’s not exactly legal but some contractors pay their workers under the table in cash. This is a shady way to run your contracting business so just avoid it. On the other hand, if you are taking on small projects that allow your customers to pay a couple hundred bucks in cash for their convenience, that’s perfectly fine. Just make sure to give and keep receipts and to record it as income on your balance sheet.
3. Utilizing the Best Resources
Few contractors have the expertise to handle their own accounting from beginning to end and why should you? Your job is to get the job done, so one way to make sure that your contracting business is doing it the right way is to do like most; hire a CPA and tax consultant.
From closing your accounting periods to filing your taxes with the IRS, having an accounting professional’s help with your books is a no-brainer for most contractors. Whether you hire a CPA on your payroll or you contract their services throughout the year, it’s just smart business to utilize the best resources available to you.
Accounting for General Home Services Contractors
General home service contractors often get paid on the fly, carry around wads of expense receipts, and hire people on a moment’s notice. Plumbers, electricians, roofers, HVAC installers, all have to take special care to track and record expenses for proper accounting.
Recording Expenses Properly
Simply spending money does not an expense create. Expenses have to be used specifically toward a paid job. That includes any money you spend on travel, licensing, hiring, materials, etc. Those are project expenses which must be kept separate from G&A (General and Administrative) expenses which include:
- Marketing Costs
- Health Insurance
- Payroll Expenses
- Business Licenses
There are instances where general expenses can be deducted for instance, expenses for your work vehicle. The IRS also allows businesses to deduct 50% from meals and entertainment expenses with proper documentation.