Every construction project comes with its unique set of requirements and challenges. The uniqueness of the construction projects derails the standard bookkeeping practices. Hence, the construction bookkeeping services are tailored to align the financial management and reporting of different construction projects.
Compared to the standard bookkeeping practices, construction bookkeeping adopts a hybrid approach owing to the variables involved. There is no one-size-fits-all when it comes to construction bookkeeping. The accounting patterns of this industry fall in between cash-based accounting and accrual-based accounting. Let’s untangle the complexities of construction bookkeeping and accounting services.
How Are Construction Bookkeeping Services Unique?
Construction bookkeeping is challenging and unique compared to the bookkeeping and financial accounting of other industries. There are a multitude of reasons and factors involved that make the construction industry exclusively complex when managing the numbers.
The topmost differentiating aspect of construction bookkeeping from other industries is that construction bookkeeping is carried out on a per-project basis. Every construction project is unique in its design and development, and so are the finances. Therefore, it puts the bookkeepers to the test when they have to customize the bookkeeping procedures in line with the project costs and variables.
Another important point to consider is that most of the industries are either service-based or product-based. For the construction industry, it is both service-based and product-based, requiring a hybrid implementation mechanism. Have a glance at the keynote features that make construction bookkeeping poles apart from other types of industry-specific bookkeeping.
Decentralized Industry – Construction Bookkeeping Services
The foundational working methodology of the construction industry is based on a decentralized principle. A significant number of activities are happening simultaneously, and it is utterly drastic to record and categorize the different types of transactions. Practically, no two construction projects are identical, which means the bookkeeping is also subject to project type.
The labor rate, equipment cost, material cost, and wage rates may vary substantially. Additionally, the local tax laws and union regulations will also have a measurable impact on the financial accounting and bookkeeping of the construction project. The situation for a contractor becomes more complicated in the event of multiple ongoing projects.
Thus, the construction bookkeeping services are unique from standard bookkeeping up to a great mark. Close attention to detail is the way forward to move past the puzzle of construction bookkeeping.
Direct and Indirect Costs
Generally, the different industrial sectors have a static cost mechanism; direct costs or indirect costs. The cost mechanism is instrumental in drafting the bookkeeping processes for that particular industry group. However, the construction business follows a different trail here as both direct and indirect costs are involved in any project.
Construction bookkeeping services are influenced by this blend of direct and indirect costs. Direct costs are related to the cost of materials, labor costs, or land procurement costs associated with a particular project. On the other hand, indirect costs cover insurance, transportation costs, and any repair costs related or not related to the project.
Recording both direct and indirect costs is the catch of construction bookkeeping while categorizing them in the correct bracket.
Project Cost and Timeframe
Construction projects are executed based on the estimated costs and the completion timeline. The initially estimated budget and completion dates are tentative and in most cases, the actual execution takes more time due to unprecedented incidents. These fluctuating cost and time estimates prove a daunting challenge for financial experts in order to maintain the books.
Payment scheduling is quite turbulent in construction projects as the estimated cost of the project is often superseded. There is a lot of ambiguity concerning the timeframe and budgetary estimates of a construction venture. In parallel to this outcome, the bookkeeping pattern for construction projects is not the same for every project.
Construction Bookkeeping Services – External Constraints
Mother nature can be very harsh at times. Extreme and unfavorable weather conditions can easily change the progressive course of a construction project. Any natural calamity can hamper the execution of the project, which in turn will cause distress in tracking and recording the expenses.
Apart from the weather conditions, labor union protests, equipment malfunction, or acute shortages of any material can also increase the estimated cost and the timeframe required for the completion of the project. These unexpected external factors make the bookkeeping procedures considerably intricate.
The construction industry is also susceptible to political instability. Any major political instability can force the workers or the management to halt construction operations. Such lags in the working process are a headache for bookkeepers.
Unlike other industrial fields, the construction sector is unique because of the score of different contributing factors.
Overhead Expenses
Another unpredictable reality of the construction sector is the overhead expenses which may turn the tide of the books to be recorded. Breakdown in equipment, loss of material, or increase in labor costs cumulates as overhead expenses. These overhead costs present a challenging feat for the construction bookkeeping services.
Accounting for the overhead costs is compulsory to have a clear understanding of the financial standings of a project. Without the proper recording and categorization of overhead expenses, the financial statements are incomplete.
Retaining Contracts – Construction Bookkeeping Services
Contract retainage is the amount of money withheld by clients during the execution phase of a construction project. Generally, 5 to 10% of the total contract value is withheld until the client reviews the work delivered. The cost withheld and its subsequent dispense in segments creates a challenging task for the bookkeeper.
The unpredictability of the amount withheld is a certain reason for the construction bookkeeping and accounting to be unique by a great length.
Payroll Variations
Most employees of a construction company are paid per the hourly rates determined in line with the governmental regulatory bodies (State Department of Labor). However, union rates, special allowances, and workers’ compensation can all pile up to compound the payroll processes.
Furthermore, machine operators and different workers specific to different tasks will have unique pay scales. A complexly segregated payroll structure makes the bookkeeping for the construction industry distinctive.
Tips For Construction Bookkeeping Services
Separate Journals For Payable, Receivable, and Costing
Regardless of the direct and indirect costs involved in the construction projects, there must be three different journals for accounts payable, accounts receivable, and job costing.
Accounts Payable: All the bills are listed in this journal such as utilities, insurance, rental equipment, or rental spaces.
Accounts Receivable: The complete listing of credit amounts from clients will be added to this journal. Keep a record of all receivables per the date, time, and project phase.
Costing: This journal records the payment to contractors, subcontractors, material purchases, and payroll of workers.
Job Costing For Project Management
Every construction project will have a different workflow operations. You will have to estimate the job cost for every task executed to manage records for the construction bookkeeping services. The job costs typically included labor costs and material costs.
It is preferable to follow through the job costing process with the help of software. Doing this process manually is extremely time-consuming and prone to human errors. You can quantify the task by dividing the whole project into measurable sub-tasks and recording the job cost for each of them.
Apart from seamless bookkeeping, job costing will be immensely beneficial in measuring the progress of the project in terms of time and money. Therefore, based on the estimated and actual cost and timeframe, you can determine the efficiency of the work executed.
Multiple Bank Accounts – Construction Bookkeeping Services
It is not simple to track and record the transactions if only one bank account. Considerable types of transactions are taking place during the project development phase. Furthermore, the situation becomes more difficult when multiple projects are in operation simultaneously.
Having a single bank account will do more harm than good for the bookkeeping and accounting processes. The ideal approach is to have multiple bank accounts, each dedicated to a specific accounting task. For instance, there should be a separate account for payroll management and a separate one for material/equipment purchases.
Using Milestone Payments For Cashflow Enhancement
Due to the enormous amount of tasks involved in a construction project, the best payment methodology is to go for milestones against each job completed. Based on the previously created sub-tasks for the job costing, you can use the information as project milestones.
As soon as you finish a milestone, you get paid for it. This way, it becomes very easy to track and record the finances for construction bookkeeping services.
Don’t Miss Out Contract Retainage
As discussed earlier, 5-10% of contract retainage is generally adopted for construction projects. This will certainly have an impact on the bookkeeping procedures. Contractors often miss out on contract retainage during the initial stages of the project. Missing out on contract retainage will invalidate the bookkeeping information.
So, it is a good idea to keep that incorporated as a secondary piece of information on the invoices. That way it will pave the bookkeeping operations.
Final Thoughts
Construction bookkeeping services are unique and operated in a differently organized manner compared to bookkeeping for other industries. There are a good number of reasons for this differentiation such as diverse payroll, direct and indirect costs, and decentralized operations.
However, keeping a structured pattern of operations will assist in maintaining the bookkeeping and accounting for the construction projects. To get expert professional construction accounting services, get in touch with Nuage Digital.