Bookkeeping for a construction company can sometimes be considered challenging because there are many other moving parts and uncertainties, compared to other industries. Supplies prices, global competition, labour prices, and much (much) more impacts the construction industry in Canada. That is why we have created this guide filled with bookkeeping tips for construction companies.
There are a lot of moving parts when it comes to construction. The beginning of a project starts out with estimating, which then moves to completing the work, then to completing the job and collecting the payment. All of these are equally crucial – and are susceptible to their own challenges.
Not only are there these variables, the work frequently takes place at more than one location or job site.
This means that there is travel between sites, possibly movement of tools or rental equipment, and inventory of supplies that needs to be allocated. We haven’t even brought up the office!
As a small business owner, you need to make sure that you keep track of all of your expenses at all times. There are several types of software that you can implement, or you may choose to hire an accounting professional.
We are going to cover a few points that are sometimes overlooked, or where mistakes are easily made.
Overhead
Overhead in construction can be a lot and sometimes forgotten about when estimating a job. This is usually because when you are quoting a job, you will be thinking about labor, materials, and subtrades. You are focusing on what is needed to complete the project, so it is easy to forget about some, or all, of the ‘extras.
These extras are your overhead costs. This list can be extensive and can include insurance, Worker’s Compensation Board payments (WCB), tools, and equipment maintenance and repairs. Your overhead also includes any costs related to your office. This can include rent, insurance, utilities, office equipment and any other loans.
Finally, these overhead costs also include any administrative help, or services required to keep your company running.
Once you have made a complete list of your overhead expenses and added them up, now you need to allocate this amount to your projects. For example, if you determine that 20% of your profits go to paying your overhead expenses, then you need to add that same amount to your estimate.
You may think it would be easier to allocate overhead costs to a project based on the length of time of the project. In construction though, this can sometimes be hard to determine, or control.
When creating a procedure to allocate your overhead costs, it is always best to consult a bookkeeping professional to assist you so that you don’t run in a deficit.
Poor job costing/ estimating
In addition to not taking into consideration your overhead, you need to have a system in place for costing out your estimates and materials. You may remember the big things, like lumber and drywall, but if you forget the small things like nails or glue, these expenses can quickly add up.
Job costing software is useful in that it is made up of cost types, cost activities, and cash flow analysis, but you still need to choose which will work best with your company. Where the software will help you to keep track of your expenses, you still need to have an accurate estimate of what your labor costs are going to be. How long is it going to take you to do a particular ‘job’ and what are you paying as the hourly rate. As well, what are the expenses related to your subtrades?
As with overhead, these can quickly affect your profit margin if you don’t estimate correctly.
Cash Flow and variability in contract length
As we mentioned in our blog ‘The Difference between Accrual and Cash Accounting’, it is important to remember that even though you are following accrual accounting practices, you will need to watch your cash flow as well.
As we mentioned, when you post your expenses when they occur and your revenue when it is earned, these will not always line up in the same accounting period (as we mention next). This can quickly be a problem if you don’t also monitor your cash flow and you end up making decisions based on only a portion of the information.
Construction contracts can last a week, or many years depending on the project. This can cause the expectation of payment terms to vary. More simply stated, your supplier may require immediate payment, or they may take 30/60/90 payment terms for a longer or larger project. As well, your expectation of when you get paid can also vary.
This is why as a small business owner you need to look at the whole picture when it comes to your books.
Tracking Payments
With possibly having more than one job site, it is crucial to make sure you are not only tracking invoices, but also your payments coming in. You need to stay on top of when your bills are due so that you don’t fall behind with your suppliers, and you need to make sure that payments are being allocated to the correct jobs.
As well, you need to ensure your invoices are being paid in the time allocated. You may have holdbacks for your subtrades as well as you may have builder holdbacks. These vary by province and in British Columbia, the Builders Lien Act allows for a progressive release, so you need to stay on top of when these payments are required.
Finally, you need to keep track of your expenses as they happen, on a daily or weekly basis. If you wait until the end of the month or year, you may not remember which job the invoice goes to.
Change orders
In construction, there are frequent changes. Where change orders frequently mean additional income, it is important to remember not only the material and labor, but how they will affect your schedule, any other jobs that require the same labor, or your subtrades. If you end up having to move to other jobs or pay overtime, this will change your bottom line.
Seasonal production cycle
This is something that is important to remember if you live in a province that has extreme seasons. Minus 30 or torrential rains can seriously affect your revenue cycle, and you need to ensure you still have adequate cash flow. Not only can it affect the cost and availability of materials that your need and labor, it can throw off your timelines if not taken into account.
Fixed cost pricing
This is based on a detailed estimate that presents the total cost of a project in its entirety. Progress billing is based on the percentage completed to that point. If you are a builder that consistently puts out the same project and you know all of your exact costs, this can work for you. Cost overruns can happen because there are other variables that cannot be controlled, for example, weather or site conditions or project material costs can skyrocket.
Situations like in 2020 with everyone doing renovations, lumber was continuously changing in cost, and not to the benefit of the builder who may have already set a fixed cost.
A few reminders
Whether it’s online or in a filing cabinet, make sure that you keep all of your invoices and receipts. Where this may seem redundant in the era of technology, there is always the possibility of being audited. Or more simply, there was a simple numerical error made or you need to confirm which job a cost was related to.
Try to keep only a small amount in an account for petty cash, so that you don’t get into the habit of spending this money and having not had any record or receipts for these purchases.
Another important reminder is to make sure you keep your business banking account separate from your personal account. This can get confusing right away and also affect your cash flow.
We know that some contractors embrace bookkeeping and there are others that know their time is better spent on the job sites.
If you do choose to use software, you may still want to ask an accounting professional to help you set it up. They can help you set up a chart of accounts to track your expenses and help you to fill in the gaps that you may not think about. As well, you may appreciate the help ensuring you have set up your GST and applicable PST set up correctly, as well as any payroll.
Need help from an expert?
With all of the additional points to remember with construction bookkeeping, let one of our experts at Valley Business Centre help. For over 30 years, Valley Business Centre has been providing comprehensive bookkeeping, payroll, and tax services to our clients in Whistler, Squamish, the Sea to Sky Corridor, and Metro Vancouver B.C. areas. Valley Business Centre provides reliable and effective services to all clients.
Disclaimer
This article is written for informational purposes only. It is current at the date of posting and changes to laws and regulations may result in the information becoming outdated. It is not intended to provide legal, tax, or financial advice. It is recommended that readers get advice from a tax professional before making any final decisions.
