Dazed and confused? Whether or not a love for numbers drew you into the construction business, you cannot survive without knowing where you stand at every moment. That requires at least a general understanding of bookkeeping, and, ideally, a solid approach to job costing. Read on for pragmatic pointers and a quick vocabulary lesson too.
Laying The Groundwork
While there are of course plenty of apps and professionals that can assist you with the bookkeeping for your business, you still need to know the basics. If you are operating with a fuzzy knowledge of bookkeeping fundamentals, you are not armed to make the informed decisions necessary to thrive, even in times of shift. As John Meibers of Deltek ComputerEase, puts it: “Construction bookkeeping involves the systematic recording and management of financial transactions within the construction industry. From tracking and forecasting business expenses to managing project budgets, it plays a pivotal role in ensuring financial health and project success.” As a starting point, Meibers shares key principles of construction accounting, including these five, with Construction Business Owner:
- Job Costing
Job costing…involves allocating all costs associated with a specific construction project. Job costs include direct costs (material costs, labor costs, equipment costs, subcontractor costs) and indirect costs (overhead expenses) to provide a detailed breakdown of expenses related to a particular construction job.
- Work-in-Progress (WIP) Reporting
WIP reporting involves tracking the costs and revenues associated with incomplete projects. This helps construction firms monitor the financial health of ongoing projects, make necessary adjustments and properly recognize revenue.
- Consistency in Revenue Recognition
Consistent application of revenue recognition policies is essential…Construction companies should follow a method that accurately reflects the stage of completion and revenue earned, ensuring uniformity in financial reporting.
- Overhead Allocation
Construction companies typically have indirect costs, such as
office rent, utilities and administrative salaries, which are not directly tied to a specific project. Overhead allocation involves distributing these indirect costs proportionally across various construction projects, ensuring that each project bears its fair
share….
What about other terms you are not quite sure about but haven’t stopped to figure out? Take a look at Meiber’s full list of common bookkeeping and accounting terms for construction business owners. Attention to numbers in general, and job costing in particular, as Shauna Huntington of Fortiviti further underscores, arms you to drive your business forward:
Without job costing, it’s difficult to understand where you’re making your money. You could be making a significant profit on certain types of projects and losing money on others. Job-costing can help you determine the types of work you want to take on. It can also help you to refine how you price your work. As you review your job performance and profitability, you can see where you’re setting prices well and where you might be missing the mark. If you realize that your labor costs are always coming in higher than you had budgeted for each job, you may determine that you haven’t set your burdened labor rate high enough.
Analyzing and comparing the costs and profits behind each job can also help you focus on the niche where you are most likely to have your best wins. For example, looking at your total revenue from three projects, you may conclude that you are running a solid 30% profit margin, but job costing can help you do even better. Through a deeper analysis of the projects, you may discover something like this: “Two of the jobs…have greater than a 60% margin, while another actually lost money. If those two jobs that are a higher margin are similar in type, this might tell you that you should focus your effort on those types of jobs. You will also want to dig into the details of Job #2 to see where you went wrong.”
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