Construction Update: 8 Bookkeeping Tips to Consider for Builders

01/24/2022 Kristy Voorhees
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As you’re no doubt aware, bookkeeping for builders is challenging. Construction companies tend to have unstable workforces, wage rates that can change by location, and multiple ongoing projects with various costs and durations. Here are some bookkeeping tips that can help you stay organized and set up your business for success in the coming year.

Tip 1: Open Multiple Bank Accounts

Among the easiest ways to track expenses and revenue is to open multiple bank accounts for business use. Reserve one account for receiving payments from customers. From there, you can transfer money into other accounts as needed.

Use another account exclusively for payroll, and yet another to build a cash reserve. It’s also worthwhile to have an account designated for paying taxes.

Separate accounts help you better determine how much money is coming into your construction business each month. You can then better control how much is going out and from which part of your budget. In addition, segregating accounts helps ensure no one is writing checks against, say, payroll funds for nonpayroll expenses. All this being said, you do not want to have too many accounts. Each bank account should have a purpose to help you reach your business goals.

Tip 2: Be a Stickler for Details

Keeping business receipts is an essential bookkeeping practice. Receipts provide insight into where money is going and serve as proof of expenses in case you get audited. Generally, you should avoid paying for anything in cash because those transactions are harder to track.

As you record information, whether from expenses you’re paying or revenue you’re receiving, include key details such as the precise name of the other party, account number, date and so forth.

The best way to log and track transactions is to use up-to-date software. Ideally, you should keep separate bookkeeping journals for:

• Accounts payable (including rent, utilities, equipment and insurance),
• Accounts receivable (direct payments from customers and payments from general contractors if you’re a subcontractor), and
• Project-specific costs (such as on-site worker payroll, subcontractor payments if you’re a general contractor and material purchases).

Tip 3: Digitally Back Up Records

Organize and file receipts, invoices and other documents so that they’re easy to find later. Whether storing hardcopies in filing cabinets or saving digital files on a hard drive, it’s important to have backups in case the original documents are lost or damaged.

A best practice is to make three digital copies of each document, for example:

1. Save one copy on a secure hard drive,
2. Save another copy on an external storage device, and
3. Save a third copy on a cloud-based platform.

Backing up data weekly is generally sufficient, but how often you should back up data depends on how frequently you update it.

Tip 4: Use Job Costing

The tracking of specific job costs — known simply as “job costing” — is useful because it helps pinpoint the specific costs of each project, which can later lead to more accurate estimates and job budgets. Job costing also can help you determine which types of projects are profitable and which ones to avoid.

Put simply, the process involves breaking down a project into phases and then listing the tasks needed to complete each phase. Tasks are then divided into three expense categories: 1) labor, 2) materials (direct and indirect costs), and 3) overhead. Those costs are then added together. Going forward, tasks can serve as line items that you can easily add or delete from estimates as the scope of a potential project is defined.

Tip 5: Tighten Up Tracking of Labor Costs

Your construction company’s labor force might include a combination of salaried employees, union- and nonunion workers, and independent contractors. To truly succeed at bookkeeping, you must diligently track the hours and type of work performed by everyone.

Unfortunately, the tracking of labor hours and costs on multiple projects can easily become disorganized or, worse, inaccurate, and turn into a number-crunching headache. There are many Web-based tools and mobile apps available for construction companies of all sizes to automate the process and reduce human error and oversight.

Tip 6: Improve Inventory Tracking

It’s not unusual for a job to require more labor or materials than originally anticipated. If you’re constantly taking materials from inventory, you can quickly go overbudget on that project and find yourself short-supplied for others.

With supply chains in such bad shape recently, maintaining a solid inventory of materials could allow you to stay operational while competitors are waiting for their shipments. But you might need to upgrade your bookkeeping efforts and software to keep a more accurate inventory of materials and their related expenses. Doing so should enable you to more easily see where your resources are going and budget accordingly.

Tip 7: Don’t Let the Ink Dry

Many contractors wait until a project is complete or almost done to start recording costs or incoming payments. But your books should always have “wet ink” — that is, recently updated figures and details to keep you apprised of what’s really going on.

After all, unexpected expenses can occur at any time that require immediate adjustment to a job’s budget or even your company’s overall budget. On a more positive note, a properly documented and processed change order could mean you’ll receive more revenue from a project than expected.

Tip 8: Ask for Help!

Establishing and maintaining these and other bookkeeping best practices isn’t easy. We’re here to review your ledger, offer advice on better financial recordkeeping, suggest ways to improve payroll management, and even help you identify opportunities for growth.

For any questions related to this article, or for bookkeeping guidance in general, please contact Kristy Voorhees at kvoorhees@vlcpa.com or 800.887.0437.

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