With the physically demanding nature of a Builders job, managing bookkeeping and administration can often be neglected. Like any other business owner, it pays to cover your business in all aspects – right from the start. Sound accounting systems and practices are powerful tools that can make the difference between your business flourishing or struggling. From client management, overseeing staff and subcontractors, to the management of construction supplies – the operational processes of running a building business can be quite demanding. With that in mind, this article will cover the basics of accounting for builders and why it is important to keep up with them.

How Does Accounting For Builders Compare to Regular Accounting?

Accounting for builders is significantly more complex than regular accounting practices. A steady cash flow and profit and loss are fundamental focuses of standard accounting processes. This form of accounting works seamlessly for companies such as grocery stores or restaurants, as it involves selling from a fixed position. On the other hand, accounting for builders adds in an additional component – project accounting. Essentially, due to the construction company’s providing customised work in varying locations – every job has different timelines and costs.

Key Differences

Estimating

With costs for each month being relatively unchanged, for most businesses, regular accounting is quite simple. Conversely, construction accounting requires an understanding of varying costs for each project. On top of varying costs, builders will often deal with changes to design, materials and work patterns. Therefore, it is imperative that builders can anticipate these changes and easily pivot to take control of variations. Moreover, building company’s are based around projects, compared to other businesses that have more steady and predictable profit.

Sales

Typical accounting involves accounting for sales. The products and services provided by most businesses can be easily divided into 1-5 categories. Construction companies, on the other hand, offer a diverse range of services, including consultancy, service work, labour, engineering, physical products, design, and materials.

Costs of Goods Sold

In regular accounting practices, the cost of the goods sold can be simply recorded. However, it is not that straightforward in the building industry. Every task has direct and indirect costs, which are further broken down into different categories.

Overhead/Expenses

When it comes to regular business accounting, the expenses and cost of goods sold are distinct. When it comes to construction, however, this is not the case. For example, many items that a grocery store would categorise as “overhead” will instead be considered “costs of goods sold” in construction accounting, as they are directly related to the customers’ project.

Break-Even

It is easier to calculate break-even points in regular business accounting due to the direct relationship between expenses and income. However, when it comes to construction, it can get difficult to determine the break-even on a project as there is a wide range of item categories. Moreover, the majority of the projects are exclusive customized jobs, with specific detailed requirements and a variety of costs associated with them.

Long-Term Contracts

Builder contracts often vary in length – you often manage both short and long-term contracts. Therefore, they will have a varying end date that results in inconsistent payments each month. Payments could either be made upfront or take months before the final invoice is settled. Therefore, construction accounting requires increased effort put towards ensuring your cash flow and books are in check and to cover your business whilst awaiting payments. For instance, this may require you to develop separate profit and loss statements for each project undertaken.

What Are The Best Practices for Builder Accounting?

Create an exclusive bank account for business finances

An easy preliminary practice to assist in the accounting processes is separating personal and business finances. By having an exclusive business bank account, you can get a clear snapshot of how well your business is operating. Not only does it make things a lot easier for you and/or your accountant come tax time, but it also helps keep things clear as your business begins scaling, or should you decide to sell it.

Job costing: break down costs of projects

One of the most foundational accounting tasks for businesses is understanding the true cost of each project and breaking it down. Accounting for builders is project-centric with costs varying widely from job to job. Therefore, it is essential to track, categorise, and report transactions for each job – this is known as job costing. These practices will assist in identifying the profitability of each project and ensure that contract prices encapsulate all overhead expenses, costs of labour and materials, whilst ensuring profit generation.

Job costing example:

Your construction company completed a project for a client. The total cost of your company’s billable labour hours is $40,000 and you will bill $7,000 in material costs. Your company has identified your applied overhead cost for the project is $10,000.

Here is how you would calculate job costing:

Direct materials ($7,000) + Direct labour ($40,000) + Applied overhead ($10,000) = $57,000

You can now utilise this job costing to evaluate individual projects and identify if any expenses can be reduced on similar projects in the future.

Track business expenses

This process involves keeping a journal or spreadsheet updated with all expenses. Therefore, you will want to note the description, date, payment date and categorise expenses by service and by individual projects. Some common expenses to track are:

• Insurance
• Lease payments
• Safety equipment and uniforms
• Subcontractors
• Employee payroll
• Advertising and marketing
• Business registration and licensing
• Bank fees
• Tools and equipment
• Travel expenses (including fuel)
• Electronics
• Vehicle maintenance
• Phone and internet expenses

Along with this, each month you will want to reconcile your transactions to make sure that they align with your own accounting system, invoices and payments.

Leverage accounting software for builders

Today, most accounting software has all the capabilities to do everything discussed earlier in this article that can take the burden of manual tasks off your hands. Builder accounting is notably more convoluted than general business accounting. Therefore, it is worthwhile employing integrated accounting software to manage day-to-day accounts, take care of billings, invoices, and other related expenses. This software will allow builders to seamlessly send invoices online, track expenses, monitor payment status, generate P&L statements adapted to construction company requirements and generate various other financial reports. Ultimately, accounting software takes the burden off builders and frees up time to spend on other high-value tasks.

A final word on accounting for builders…

Strong foundations are critical to the security of any builder business. Therefore, make accounting part of your workflow and update it regularly to cover yourself for any missed expenses and/or surprise audits. Importantly, maintaining a profitable construction business comes down to how well you manage your cash flow. To gain a competitive advantage, take into consideration the matters discussed in this article and stay on top of your business today.

PiPr is home to builders and property developers. See what PiPr has to offer here or contact us here, we’re always happy to have a chat.