A construction company can earn substantial amounts of money, yet continue to have difficulty protecting its bottom line from losses. The company could complete multiple projects, only to find out that the real margin on the project is not as high as planned because of overtime work, increased material costs, change orders, late billings, and untracked project expenses.
Bookkeeping involves keeping track of financial transactions, but a contractor needs more specific financial data in order to evaluate how the particular project goes. The services of a hired bookkeeper with expertise in construction accounting could assist in project expense tracking, job profitability monitoring, account reconciliation, and financial problem solving prior to the issue becoming worse. Growing contractors could benefit from hiring a remote bookkeeper for construction businesses.
Why Basic Bookkeeping Is Not Enough for Contractors
Conventional bookkeeping involves tracking income and expenditure. This process is important, but for contractors, it is important to know how these figures relate to particular projects.
The construction firm will often be working on multiple projects at once and each will have a different budget, schedule, subcontractors, materials and labor needs.
Project Level Accounting Is Important
The realization that the company has made $500,000 over the month does not tell anything about which projects these expenditures belong to.
Contractors should account for expenses per project and these include:
- Direct labor
- Materials
- Subcontractor costs
- Equipment
- Permits
- Overhead related to the project
- Other job specific expenses
It is easier to compare the project costs and initial budget when accounting is done per project.
Revenue Is Not Profit
A huge contract can generate a lot of revenue, but not profit.
This is because a particular project might seem profitable by looking at the contract amount, but unanticipated labor, materials and subcontractor expenses reduce the actual profit.
How a Bookkeeper Helps Contractors Track Project Costs
Cost accounting is probably one of the key elements of construction financial management.
It is critical that a contractor has an understanding of what costs have already been incurred for a particular project and how these costs differ from initially planned budgeting.
Accounting for Labor and Materials Costs
In many cases labor and materials make up a considerable part of construction expenses.
It is possible to classify payroll and related expenses and costs for materials so that they will be assigned to the proper projects.
In such a way contractors may find out which of their projects cost them too much money.
Accounting for Subcontractors' Expenses
In many cases a construction company uses the services of subcontractors for specific tasks.
The contractor needs to record subcontractors' expenses and assign them to the relevant project.
How Bookkeeping Supports Job Profitability Analysis
Profitability information is not limited to profit and loss statements. Contractors require additional information on project level profitability.
Comparison of Expected and Actual Costs
Before the project is started, the contractors usually expect to have a certain budget.
During the course of the project, actual costs are compared with the expected ones.
Such a comparison could reveal:
- Overhead labor costs
- Higher material costs
- Unexpected costs of subcontracting work
- Costs of equipment usage
- Changes in scope of work
The earlier the difference between expected and actual costs will be detected, the more time there will be for investigating the reasons for such a difference.
Identification of Projects with Decreasing Margins
If the project initially expected to have high margin becomes less profitable, due to growing costs,
then financial reports could help managers to detect such a trend before the end of the project.
How Change Orders Affect Project Profits
Changes may have an effect on the revenue and costs of the project; however, they should be properly documented and accounted for.
Monitoring of Additional Revenue and Costs
In case there is a change in the scope of a project, then there will be changes in the revenue as well as the expenses.
There are some bookkeepers who will help in maintaining records for the changes made so that the financial impact of those changes is recorded accurately.
This is important in order to prevent contractors from having situations in which additional work is done, but not documented in terms of revenue or costs.
Avoiding Undocumented Work Problems
In case there is additional work that is done but not properly documented and billed, then contractors will suffer from problems relating to cash flow.
Why Cash Flow Management Is Critical for Contractors
It is possible for a construction firm to make a profit in accounting terms while facing cash problems at the same time.
The schedule of payments from customers, payroll payments, payment of suppliers, and other expenses can have an effect on cash flow.
A bookkeeper can assist contractors in maintaining more precise and up-to-date accounting data.
Accounts Receivable Management
Contractors usually have to monitor customer payments and amounts owed from completed or unfinished projects.
Accounting reports for accounts receivable allow managers to spot unpaid invoices and estimate future cash receipts.
Accounts Payable Coordination with Projects
Contractors also have to control payments to suppliers, subcontractors, employees, and other creditors.
Keeping accounts payable well-organized gives the firm a clearer picture of future obligations.
When Contractors Should Hire a Bookkeeper
As a construction business grows, financial administration can become too complicated for the owner or project manager to handle alone.
Knowing when to hire a bookkeeper can help contractors establish stronger financial processes before problems develop.
When Multiple Projects Are Running at Once
Handling multiple projects creates more transactions and makes project-level record-keeping necessary.
An assigned bookkeeper will assist with keeping separate financial records for all jobs.
When the Owner Spends Too Much Time on Bookkeeping
For contractors, handling tasks such as budgeting, managing projects, dealing with customers, employees, and sales is usually important.
Bookkeeping that takes lots of time from these activities should be delegated to professionals.
When Project Profits Are Hard to Identify
When it is hard to figure out which projects make money knowing just the total income and expenditures, the existing bookkeeping system does not seem sufficient.
A professional in construction bookkeeping can create better reports for projects.
How a Virtual Bookkeeper Can Support Contractors
Contractors do not necessarily need an accountant sitting in their office every day. Many bookkeeping responsibilities can be handled remotely using cloud-based accounting systems and digital documentation.
This makes it practical to hire a virtual bookkeeper for ongoing financial support.
Flexible Support for Growing Construction Businesses
A virtual bookkeeper can help in areas including:
- Transaction recording
- Bank reconciliations
- Accounts payable
- Accounts receivable
- Payroll bookkeeping
- Project cost accounting
- Financial reporting
The amount of assistance needed can vary depending on the workload of the contractor.
Ability to Access Industry-Specific Bookkeeping Experience
Virtual assistance can enable contractors to access those who have experience in construction bookkeeping instead of being limited to looking for those within their locality.
Industry-specific experience is essential because construction bookkeeping will involve things like projects’ costs and subcontractors among others.
What to Look for in a Bookkeeper for Hire
Choosing the right professional is about more than finding someone who can enter transactions.
Contractors should look for a bookkeeper for hire who understands the financial structure of construction businesses.
Construction Industry Experience
Ask about whether the bookkeeper has worked with contractors, subcontractors, builders, or other companies in the construction industry.
Experience will be valuable for setting up proper accounting systems for the construction projects.
Understanding of Job Costing
Job costing needs to be considered as an important requirement while choosing a construction bookkeeper.
The bookkeeper needs to have knowledge of organizing labor, material costs, and other expenses for different projects.
Reporting Capabilities
Ask about the kinds of reports that the bookkeeper is capable of generating along with their frequency.
The reports need to provide information about the cost, profitability, cash flow, and other aspects of the projects.
Bookkeeping basics are indispensable for all contractors; however, even bookkeeping by itself may prove insufficient for securing the profitability of their projects. Construction companies require financial data that will help them link their revenues and expenditures to certain projects. It will help them track such costs as labor costs, material costs, subcontractor costs, change order costs, receivable costs and others related to each project.
If the contractor’s company lacks the internal staff, they can hire the best virtual bookkeeper from The Fino Partners who will take care of repetitive financial activities and keep the records neat and tidy.
