Back to Basics: The Percentage of Completion Method of Accounting for Contractors

This section offers recommendations for software that provides essential features without overwhelming complexity, helping you manage your business effectively. Choosing the right software for your construction company requires understanding your unique needs and selecting a solution that can grow with your business. This section provides tailored recommendations for small, medium, large, and enterprise-level companies to help you find the best fit for your operations. If you want to learn more about selecting the right software https://www.bignewsnetwork.com/news/274923587/how-to-use-construction-bookkeeping-practices-to-achieve-business-growth and implementation best practices check out A Comprehensive Guide to Construction Financial Software Selection & Implementation Management.

Construction accounting FAQs

• It’s not uncommon for circumstances beyond your control to impact the price of materials, equipment, and labor costs.
• Choosing the right software for your construction company requires understanding your unique needs and selecting a solution that can grow with your business.
• The wage rate for a worker in a state or locality is not the same but rather the US Department of Labor and regulatory agencies in each state.
• That’s where job costing and the job cost ledger provide powerful tools for construction accounting.
• It also ensures that financial statements accurately reflect the company’s financial position.

Although cash accounting is flexible and accessible, you must fit certain criteria set out by the IRS in order to use this method. To be eligible for the cash method the IRS states that your construction company must have less than $25 million in gross receipts (over a three-year period). As a result, WIP reports are a powerful tool for fostering precision with your numbers. For a deeper look at WIP and its impact on accounting for construction check out our article on “Everything you need to know about WIP”. Retainage, or retention, is a percentage of the total contract value withheld by the client to ensure project completion. Accurately account for retainage amounts in your financial reports, as this impacts both your cash flow and overall project profitability.

Separate Your Expenses

• Our mission is simple — help contractors streamline operations and navigate workforce planning complexities.
• Equity, also referred to as net worth, is made up of the assets left over after liabilities are paid.
• With the steps in this guide, you have everything you need to do construction accounting for your company the right way.
• This is especially true with a company that uses mostly long-term contracts, which are generally more compatible with the percentage of completion method.
• While simple to implement, this method may not provide an accurate picture of a project’s financial performance, particularly for long-term projects with multiple payment milestones.
• When tracking your transactions, a double-entry bookkeeping system is the best way to ensure your records’ accuracy and reliability.

With the steps in this guide, you have everything you need to do construction accounting for your company the right way. For those looking to streamline their operations further, explore our post on the best construction apps to enhance your efficiency. You can use construction invoice templates to bill your clients and keep a paper record of all construction projects and revenue generated. The first step for all construction firms is to open a separate business bank account that will be used exclusively for your business. For these reasons, construction companies may need to generate separate profit and loss (P&L) statements for each project.

Steps for Setting Up Accounting in Your Construction Business: From Job Costing to Retainage Tracking

• In general, a construction business with gross receipts (also known as Business Tax Receipts) over $10 million must use the percentage of completion revenue recognition method for tax purposes.
• Once you’ve made your choice, foster a collaborative working relationship with the outsourced team by defining mutual expectations, goals, and objectives.
• For contractors, having robust bookkeeping practices helps maintain profitability and control over each project.
• Bridgit Bench is a workforce planning platform built to help construction professionals, including accountants.
• It is a way to forecast a project’s costs by estimating things such as contractors, materials and supplies, and overhead.

Projects like government-funded projects require you to pay a prevailing wage, a minimum hourly rate that’s typically higher and determined by each state’s Department of Labor. Paying any lower than what’s legally mandated can result in penalties—and even jail time. Here are some things to look for when choosing the right bookkeeping software for your construction business. There is a lot of construction software out there for today’s construction firms to choose from. Ideally, a construction software that automates some – or all – of your bookkeeping would make running your business a lot easier. If you don’t have a bookkeeper, you’ll be responsible for reconciling your bank accounts.

Common Pitfalls Construction Companies Run Into With Bookkeeping

What’s more, you may find yourself paying higher taxes if your business operates in multiple states. The construction industry is a multifaceted mechanism that consists of many moving parts. This complicates tracking revenue and expenses even for a single project, much less multiple ones. Plus, you’ll have all the tools you need to construction bookkeeping stay on top of your construction accounting and make smarter financial decisions. Many construction companies use a “completion percentage” approach, meaning they calculate estimated taxes based on quarterly income and expense reports. You can use that bank statement to reconcile your transactions to make sure they match up with your own accounting system, invoices, payments, etc.