Construction Accounting is complex and problematic. Compared to “regular accounting,” construction accounting has unique requirements, processes, documents, and procedures. Add in the intricate payroll complications for contractors, where work extends across multiple states, requires prevailing wages, or involves unions. With all the requirements and variables, you can see why construction accounting can be problematic for even the most experienced bookkeepers.
At Suttle and Stalnaker, PLLC we have over thirty years of serving clients in the construction industry. Using that experience, our team of experts has identified the ten best practices in construction accounting that will help increase business in several key areas, such as job profitability, managing cash flow, and growing your business.
- Job Costing
Job costing is vital for construction accounting due to contractors needing to accurately track the cost of their projects to make a profit. Tracking costs might seem like a simple process, but many different elements go into job costs, such as labor, material, equipment, and overhead costs.
With job costing, each project is assigned its own set of work breakdown structures (WBS) that include the income and expenses that occur during the different phases of the project. The WBS allows project managers and contractors to see how much is being spent on the project and provides project managers and contractors with the ability to easily adjust projects when necessary, allowing for a better understanding of how to maximize the profitability of each project.
- Track Committed Cost Daily
The cost already committed for materials and subcontractors needs to be tracked in real-time to allow the project manager or contractor to remain in control of the job and keep it profitable. In addition, tracking costs in real time will let the project manager or contractor know the budget available for any additional costs or expenses. Examples of the committed cost may include but are not limited to, open subcontractor agreements, purchase orders, time from the field, and expenses from the field.
- Margin vs. Markup
Understanding the difference between margin and markup is essential to managing any project. Markup is the difference between the cost and price of materials or services. Margin is the gross profit on a job and is a percentage of the sales price. A mistake in the two terms can be costly and cause a price to be too high or low, resulting in losing profits and, potentially, business.
- Percentage Spent and Percentage Completion
Just because you have spent 50% of your budget does not mean the project is 50% complete; you may have only completed 40% of the work. Understanding and tracking the percentage spent and percentage of completion through your WIP report will allow project managers and contractors to come in under budget and better understand the status of a particular project.
- Work-in-Progress Reports
Work-in-progress reports (WIP) are one of the most vital reports for a project manager or contractor as they provide a detailed schedule of completed and in-progress work for a designated period. Running WIP reports often will allow project managers and contractors to manage work and profit proactively and not reactive to situations that may arise on a particular project. Commonly used WIP methods include units complete, percent complete, and cost-to-finish; WIP reports also are used to identify under and over-billing amounts.
- Overbillings vs. Profit
Overbilling is when a project manager or contractor bills ahead of work completed, positively affecting cash flow. If not managed correctly, this can lead to problems because project managers and contractors will not have the available cash to fund the remaining work. If you overbill by $20,000, that is not a cash profit that you can spend. The $20,000 should be recognized as payment for work that has not yet been completed.
- Successfully Managing Your Change Orders
Changes happen; when those changes occur, a change order comes into effect to adjust the initial contract. To successfully manage your change orders, the initial contract must be detailed, easy to understand, and include the process for a change order. Establish a structured approach for the change requests with the client and the internal team managing the project.
Change orders frequently occur in the construction industry; creating a change order template for your clients will save project managers and contractors time, rather than manually creating change orders at the requested time.
- Monitor Unposted Payroll
Lacking the ability to monitor payroll can be detrimental to the profitability of a project. Therefore, implementing the ability to monitor the effect of employee hours on the budget without actually processing payroll is essential for project managers and contractors to ensure each project is profitable.
- Labor Hours Tracked Daily
Workers must turn in their time at the end of each work day, not the following day or a week later. Tracking hours with remote field-to-office tools, or mobile apps, makes tracking hours more accurate and allows project managers and contractors to remain in the field and not return to the office to submit hours.
- Choose the Right Construction Accountant
Construction accounting requires unique and complex requirements that almost always call for a Certified Public Accountant specializing in construction. With more than 30 years of construction experience, Suttle and Stalnaker can be a critical next step in building your construction business. Contact your Suttle and Stalnaker representative or a construction team member to see where our industry experts can assist you and your business!
Chris Lambert CPA, CGMA, CCIFP, is an audit and consulting Member of Suttle & Stalnaker, PLLC, with over 30 years of public accounting experience. Chris has extensive consulting and audit experience with construction clients. In addition, he has experience in accounting systems, internal audit assistance, financial reporting consultation, audit preparation consulting, and internal control systems consulting.
Bart Scott CPA, CVA, MBA, is a member in the firm’s tax and business consulting areas. Bart has over 20 years of experience in accounting and business management. He has worked in public accounting and has previously held positions in the healthcare and governmental sectors. In addition, Bart has experience within the firm in business consulting, auditing, and business taxation.
Danny Shobe CPA, CCIFP, is a member who works primarily in the tax department of Suttle & Stalnaker, PLLC. Danny has over ten years of public accounting experience and over 12 years of controller experience in the construction and oil and natural gas industries. He is responsible for preparing and reviewing tax returns, providing tax consultation and planning for individual and business taxes, and communicating with clients during engagements.