Construction is simply different from every other industry. With retail, manufacturing, or even agriculture, you tend to operate your business by fairly predictable patterns.
Construction contractors (or general contractors), however, have to see each and every project as its own revenue stream. The timeframes are rarely the same, and each job has its own unique expenses and financial challenges.
That’s why general contractor accountants are a valuable part of any construction business. Read on to learn why these accountants aren’t like all the rest, how the construction industry has unique accounting needs, and some of the common mistakes construction companies make when it comes to their finances.
Why General Contractor Accountants Are Different From the Rest
First, we should clarify that the “contractor accountants” we’re discussing are accountants who work with general contractors in the construction industry…not accountants who hire themselves out on a contract basis.
General contractor accountants are a different kind of accountant, much like construction is a different kind of business. In order to stay on top of all of the things involved with a construction company’s finances, a contractor accountant has to be able to manage a lot of moving parts all at the same time.
In the financial world, all accountants must adhere to Generally Accepted Accounting Principles (GAAP). These are procedures established by the Financial Accounting Standards Board (FASB) that are the standard within the accounting industry. That way, everyone is speaking the same language and operating by the same rules.
Since the construction industry operates on a project-by-project basis, each with its own budgets, incomes, and expenses, contractor accountants need to be able to go well beyond GAAP in their understanding of their trade.
Construction Accounting and Financial Management
As the owner of a general contractor/construction company, you are most likely working from a central location that is not close to the multiple jobs your crews are working on at any given time. That can make it hard to stay on top of the money that is flowing into and out of your business.
Then add the fact that accounting and financial management for construction companies can get complicated pretty quickly. It can be a recipe for financial disaster!
These are just a few of the ways that construction accounting and financial management differ from other types of businesses:
- Job Costing – Instead of being able to sell a widget at a fixed price, contractors live in a world where no two jobs are the same. Job costing is the process by which you can allocate an accurate amount of money to each project to cover its expenses.
Job Cost=Materials+Labor+Overhead
Being able to precisely anticipate what it will cost to get a job done goes a long way toward increasing your profitability! A good contractor accountant can help you do that. - Contract Revenue Recognition – Because construction projects can often stretch out over long periods of time, contractors don’t have the luxury of being able to record all of the revenue of a job neatly in one month. Revenue recognition methods help determine when the income from any particular project gets added to the books. There are several options available (cash basis, completion, or milestone percentages) that contractor accountants can use.
- Retainage – It would seem strange to buy an ice cream cone but tell the cashier, “I’m going to pay for part of it now and hold back a couple of dollars until I’m done eating it. I just want to make sure I approve of the final product first.”
But that’s normal for construction projects. Buyers will typically withhold (or “retain”) a percentage of the total price until they are satisfied. It’s a bit of insurance for them against defects or quality issues.
For the contractor, though, not having that money can significantly cut into their realized profits until it comes in. And how it gets recorded is important in order to have an accurate understanding of exactly how much money is available in the business. Having a qualified contractor accountant managing retainage can definitely save a lot of time and stress! - Billing – Billing for construction companies isn’t always cut-and-dry. Therefore, you need a good contractor accountant on your side to help keep track of everything. Construction businesses have several options when it comes to billing, but the two most common are:
- Fixed Price– A “one money” price quoted for the entire project, regardless of expenses. It’s risky for the contractor, but more attractive for customers.
- Time & Materials – One hourly rate for labor plus whatever it costs to purchase the material needed to do the job. Contractors typically apply a markup (2x or more) to both figures in order to build profit into the final price.
- Payroll & Bookkeeping – Juggling payroll and bookkeeping for construction companies can be extremely difficult. It’s not unheard of for one company to have employees working in multiple locations across multiple states on contracts both private and public using both union and non-union workers! You’d better hope you have a contractor accountant who understands complex payroll and tax laws.
Common Mistakes By Construction Companies
Over the past 40 years of working with a lot of construction companies (and hearing the horror stories from many more), we’ve noticed that there are a few common mistakes they make when it comes to managing their finances.
- Lack of documentation – Not keeping up with receipts or paperwork can lead to losing lots of money. If you can’t prove an expense, it never happened. If a handshake and a verbal price quote at the job site aren’t recorded properly back at the office, it can lead to a lot of frustration and a loss of money.
- Untimely Invoicing – Not submitting invoices on time can often mean not getting paid until the following month. That’s a long time to wait for a construction business that’s constantly on the go and in need of revenue.
- Misjudging Costs – Underestimating what a job will cost hurts your bottom line like nothing else. It’s nearly impossible to get a customer to pay more once a price has been agreed to, so it’s in your best interest to know up front what a project will realistically cost you.
- No Cash Reserves – Failing to maintain an adequate “rainy day fund” has sunk many businesses. Construction companies especially need a healthy supply of cash in reserve just in case things go wrong…and they will.
- Robbing Peter – One of the biggest mistakes we regularly see construction companies make is using the money from Job A to buy the materials for Job B while both are in progress. It’s like walking on a wire without a net. If something unexpected goes wrong at Job A…and it will…you could quickly be in trouble by not being able to complete Job B on time (which may be funding Job C). It’s important to have a reliable bidding process that properly funds each job on its own to keep that house of cards from crashing down.
How to Build a Successful Construction Business
General contractor accountants are invaluable team members in any construction business that wants to succeed. If you want to be trusted, taken seriously, scale, and stay profitable…partner with a CPA that understands the unique needs of construction accounting and financial management.
CRS CPA knows construction, and we can help manage your finances so you can focus on growing your business. Give us a call at (731) 668-4482 or schedule a call with one of our pros today!
