Construction Bookkeeping

If you are a general contractor or own a supporting business such as plumbing, electrical, painting, drywall, insulation, siding, roofing, or other construction trade, your primary bookkeeping concern is job costing. To be profitable, you must bid a job accurately, measure your profitability when the job is done, identify any mistakes, and continually improve the accuracy of your bidding.

Consequently, it is of utmost importance to set up your bookkeeping software to make this process as easy for you as possible. Custom-designed reports in addition to standard reports will help you assess your performance. While most software packages provide these capabilities, our current construction clients choose to use QuickBooks® or Master Builder® software.

QuickBooks® is inexpensive, user-friendly, and comprehensive in its design. Its key features, most relevant to the construction trades, include:

  • Ability to tie Income, Cost of Goods Sold, and Expense items to customer jobs
  • Time cards within the software for recording dates and hours worked per job
  • Ability to accept the downloading of time data from other time card programs
  • Payroll processing that allocates payroll costs (wages, payroll taxes, workers compensation costs) to jobs
  • Workers comp tracking and reporting
  • Estimate form (bid or proposal)
  • Progress invoicing (if needed)
  • Purchase Orders (if needed)
  • Inventory management (if needed)
  • 1099’s for reporting payments to subcontractors
  • Sales tax tracking and reporting
  • Tracking by Customer Type or other category
  • Profit & Loss by Job report

Master Builder® software has a medium price tag and seems specifically designed for the general contractor. While it is more sophisticated in its module for estimating and job costing, enabling the identification of phases within a job, it is not as user-friendly or flexible as QuickBooks®. The standard reports are quite adequate, but designing custom reports proves too difficult for the average user. There are consultants available to help with the more complex tasks.

Job costs include direct labor, indirect labor, subcontractors, job materials, and other job related expenses such as building permits and equipment rental.

Payroll is a key component in job costing. Payroll usually includes both direct labor and indirect labor costs that must be tracked by job. As a business owner or CFO, you will be deciding whether payroll is done in-house or by a payroll service. If payroll is done by a service, labor costs are not easily assigned to job without duplicating the work done by the payroll service. That seems inefficient and not cost effective. When payroll is done in-house using your own software, all the data is available for job costing. Not only will wages be allocated to job, but also payroll taxes and workers comp expenses. However, processing payroll requires a knowledgeable bookkeeper and shouldn’t be undertaken unless you are confident in your ability and discipline to submit all required reports and payroll tax deposits by IRS deadlines. Mistakes can be costly.

Proper handling of subcontractors is vitally important. Make sure you understand the distinctions between a subcontractor and an employee. The IRS and perhaps your state have very exacting definitions, and failure to comply can result in thousands of dollars in fines. At www.irs.gov, you can find a definition in an article entitled “Independent Contractor (Self-Employed) or Employee?” W-9 forms required from all subcontractors can be printed off the website too. Subcontractors can be tracked in QuickBooks® and 1099’s generated for those whom you pay $600 or more per year.

Every item purchased for a job must be identified by job. The bookkeeper sitting in the office will not know what job a purchase belongs to unless it is clearly noted on the receipt. Define and enforce procedures that ensure this data is captured before submitting for data entry. This is the heart of job costing. The client name, job name or address, or number can simply be written on the receipt by the person purchasing or receiving the item.

Tracking and paying sales and use taxes can be a challenge for contractors. The point of sale (location) usually determines the applicable tax rates. This is generally the address of the house where materials are installed. Contractors often avoid sales tax issues by paying sales taxes when they purchase job materials and simply passing the cost on to customers, but use tax issues can still come up. For example, a Minnesota sales tax audit discovered a receipt for job materials purchased in Edina, MN and installed in a house in Minneapolis. Given the point of sale was Minneapolis, Minneapolis sales and use tax rates applied to the transaction. So, while the contractor had paid the sales tax in Edina (6.9%), an additional .5% was owed as a use tax to Minneapolis. Missed items like this result in tax penalties and interest.  This is one area we highly recommend you get some help with.

Bookkeeping is so important to your business and your success, you cannot afford to delegate its design and maintenance to the inexperienced or untrained. This is doubly true when you add something as complicated as job costing to the ordinary bookkeeping tasks of writing checks, paying bills and invoicing customers. Select a good software package and seek the help of an expert consultant specializing in that software to set it up properly and train you and your bookkeeper.

The bookkeeper should not be your spouse, friend or relative who knows little or nothing about bookkeeping, QuickBooks or job costing. It should not be your secretary or office manager who knows little or nothing about it either. After all, you wouldn’t hire an electrician to do plumbing, would you? It also should not be your CPA who charges far more than a bookkeeper and whose specialty is tax preparation and financial planning, not day-to-day bookkeeping.

If you are planning to use QuickBooks®, a professional bookkeeper, who is also a QuickBooks® ProAdvisor, is your best option for set up, training, and helping you choose the best options for doing your bookkeeping.  We have many construction clients and would be very happy to help you with all of your needs.

Your CPA will appreciate your complete and accurate bookkeeping and tax preparation will be simpler and less costly. Most of all, you’ll have the information you need to make sound business decisions about how to manage and grow your business.

For more information or to set up your free consultation, please call Jennifer at (651) 324-2273 or email us at: info@fiscalfoundations.com