We are always astonished when we encounter someone who is doing the bookkeeping for a contractor and they and treat the construction business like any other business.
Using regular bookkeeping and accounting for a construction business is like trying to assess the size and risk of an iceberg by only observing what shows of it above the water surface.
Here’s a quick primer on what makes construction a whole different animal for bookkeeping and accounting – Source: Randall DeHart:
Construction Bookkeeping constitutes less than 8% of all accounting and bookkeeping, so it is given very little attention in schools, colleges and universities. What little of it we have bothers us because we see the damage caused to contractors making management decisions on inaccurate reports.
Construction type bookkeeping is used when the entire place of business is packed up and taken to the customer. In essence you are selling, assembling, delivering and installing a customized product from a mobile shop on location. Think of it like shooting a movie on location without all the glamour, resources and money to go with it.
Construction Bookkeeping Has These Things In Common:
1. Sales – With 1-10 categories
2. Cost of Goods Sold – Has Direct and Indirect Job Costs with 25 – 200 categories with 1,000s of sub categories
3. Expenses – Overhead is extremely complex because some expenses in regular bookkeeping are actually Cost of Goods Sold in construction accounting
4. Breakeven – Very difficult to calculate because most projects are one-of-a-kind custom jobs. Proactive contractors have systems and cost libraries with pre-priced assemblies for bidding which works in conjunction with Strategic Construction Bookkeeping to provide management with progress invoicing, job costing and job profitability.
5. Job Costing and Job Profitability Reporting – Is similar to the Company Profit and Loss report except that it is specific to each particular job and has different expense codes. These reports in combination with the Five Key Performance Indicators are what help the contractor understand which projects to pursue and which ones to ignore. They form the foundation of a Business Process Improvement Plan and Construction Business Strategy.
Example #1 – The contractor asks the bookkeeper “How much money did we make on the John and Mary Doe house remodel?” The bookkeeper generates a report showing $5,000 profit when in reality it was a ($15,000) loss! QuickBooks was setup like every other bookkeeping business and $20,000 worth of transactions was put in the wrong category. In this case some direct costs and some indirect costs were misallocated and not assigned to the job.
Example #2 – The contractor asks the bookkeeper “How much money did we make on the Bob and Sally house remodel?” The bookkeeper generates a report showing ($5,000) loss when in reality it earned $5,000 profit! QuickBooks was setup wrong and $10,000 worth of transactions was put into the wrong category. In this case some overhead costs were classified as direct costs and assigned to the job.
The inevitable result of not using construction-type bookkeeping and accounting for the construction contractor – The contractor makes bad decisions on what to bid and not to bid on and eventually runs out of time and money. This is why contractors MUST use construction type bookkeeping and accounting for optimal business results.