The Ultimate Guide to Construction Accounting

CONSTRUCTION ACCOUNTING 101:
 

The Ultimate Guide to Construction Accounting

CONSTRUCTION ACCOUNTING 101:
 

Updated: Aug 2, 2020

Being a successful contractor is more than just what goes into building an office tower, house or apartment complex. No matter how skillful the business is on the site ground, it will go into trouble if the contractor cannot control the financial time. Therefore, a contractor should invest time and effort in analyzing reports. 

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QuickBooks desktop version offers not only simple financial reports which every business need such as Profit and Loss, Balance Sheet, etc. but also Job-relating reports. This blog introduces contractors to 5 job-relating reports which are really useful for you. Those could help you keep your project and business on sound ground.

1. Job Estimate vs. Actual Detail

This is the most used and helpful report for contractors. By showing both estimate and actual cost and estimate and actual revenue, this report could help the contractor see the differences between what was estimated and what is in reality. Job Estimate vs. Actual Detail lists all items relating to the job in the order. Therefore, the contractor can see the comparison line by line. Information from this report is also used to calculate in the WIP (Working-In-Progress) reports.

2. Job Profitability Reports

In the case of a contractor just would like to see the differences between the amount of money they paid and were paid, Job profitability reports are good examples. There are 2 versions for Job Profitability Reports – Job Profitability Summary, which summarizes the profits the business earned from servicing each construction customer within the date range and Job Profitability Detail, which works on the same basis but for a particular job. The key indicator in both reports is the “different” column. Based on the report, contractors have a clear view of where they can stand financial in the overall business.

3. Job Progress Invoices vs. Estimate

If the contractor uses Progress Invoicing, which is recommended, the contractor should concern of Job Progress Invoices vs Estimate Report. Whether or not the estimate is active, it is shown in this report. By analyzing this report, the contractor can keep in the total how much the estimate is, how much has been billed and the percentage of the estimates which are already invoiced in the progress invoicing.

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4. Time by Job Detail

Contractors can use QuickBooks to track time per employee working on a Project. Consequently, they can generate the Time by Job Detail report seeing how much time was spent on a project by each employee. From that point, they could change or improve the working hours and the effectiveness if needed.

5. Items Estimate vs. Actual

A contractor might provide a variety of services. This report can help them analyze how close the business estimated costs and revenue for each item and construction phase. The contractor can use the report controlling, managing and making decisions to keep the business moving toward a financial position.

Successful contractors don’t need to have a degree in accounting or financial management, but they need to be more thorough in their financial decisions. Paying consideration of the 5 job reports can get the business moving in the right direction.

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If you, as a business owner, see that you cannot handle accounting on your own, consider hiring an accountancy service for contractors to help you with it. 

Call Irvine Bookkeeping now for a Free Quote!

#lawbookkeeping #ioltaaccounting #reconciliation #trustaccount #smallbusinessmanagement #budget #administrative #bookkeeping #accounting #digitalmarketing  #irvinebookkeeping #managebookkeeping #accounting #la #ca #california

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5 Must-have QuickBooks Reports for Successful Contractors

Updated: Aug 2, 2020

Why is An Accurate Estimate Important ?

Take a moment to look at the tallest building in your city. Think about what’s going on inside it. You could imagine employers interviewing new trainees or maintenance staff up on the ladder fixing light bulbs. Now, flashback before the building was built, it was just an empty space. In order to build that tall, monumental building, contractors had to factor in materials and labor and develop a construction estimate to predict how much it would have cost to construct it. Then, they had the estimate and started building, think about how the building’s owner paid. Of course, they can NOT pay in full like the way we paid our painter for painting 3 walls in the house. Instead, they used the progress invoicing which allows them to split the estimated total amount into multiple smaller payments.

Why need to have an accurate estimate?

  • Construction projects are different from product manufacture or retailing in assembly lines: each building is unique, even for groups of buildings that look similar to each other. So, the estimate should be prepared individually

  • Projects are set timeline and budget to complete. An accurate estimate forces a business project to stay on schedule and on track. Any slight miscalculation could magnify into a massive setback for a project.

  • A well-prepared estimate also helps decision-making. The information on the estimate could be used by the owner to consider making an investment as well as cost-cutting for savings. The assumed numbers are then built into commitments, contracts, budgets, procurement, and accounting accruals. If the information in the estimate is not correct, it could lead to some further changes or compensation.

  • The estimate is used to prepare Progress Invoicing, which affects the whole billing progress. An inaccurate estimate could lead to an incorrect payment amount.

In conclusion, the Estimate is the document that records all charges a contractor would like to receive from the customer. From that point, whenever they complete a stage of the project, they generate a Progress Invoicing for payment. In other words, Estimate is the foundation of the Progress Invoicing.

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If you, as a business owner, see that you cannot handle accounting on your own, consider hiring an accountancy service for contractors to help you with it. 

Call Irvine Bookkeeping now for a Free Quote!

#lawbookkeeping #ioltaaccounting #reconciliation #trustaccount #smallbusinessmanagement #budget #administrative #bookkeeping #accounting #digitalmarketing  #irvinebookkeeping #managebookkeeping #accounting #la #ca #california

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Why is An Accurate Estimate Important ?

Updated: Feb 25

What is Underbilling?

In the Percentage of Completion Project Accounting, 2 terms are frequently used: over-billing and under-billing. Underbilling represents the practice of not billing fully for all of the labor, materials and services provided in a billing cycle.

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Underbilling is the opposite of overbilling and occurs when a contractor performs a certain amount of work in a billing period but does not make invoice their customer for the full amount of completed work. For example, in the billing period March 2020, a contractor completed 45% of a project, but sending to the customer a progressing invoice for just 30% of the overall contract, the contractor has underbilled by 15%.

So, why does a contractor underbill?

One of the most common reasons why construction companies stuck in underbilling situation is not to complete the progress invoicing on time. If contractor and customer agree to set up a fixed time to send invoice and make payment, contractor can not get up-to-date cost to be paid. For example, the contractor is expected to get his progressing invoice on the 1st of every month, and get paid around 10th, he can not have costs occurring from 2nd to 10th paid. That leads to a underbilling period.

Another reason for this circumstance is that contractor got a bad project management accounting. Unlike not completing the progressing invoice on time, which might not affect your overall revenue, bad project management could turn into unrecoverable losses. Let’s go through some bad practices following:

  1. Underestimate project costs. For example, the contractor estimated that Concrete phase just needs 5 workers with $200 per one to be completed. So, the whole-time contractor thinks it’s going to cost about $10,000 to complete the concrete phase. However, they have to hire 2 more workers to get the work completed on time and the work ends up costing $14,000 in the end. As a result, the contractor could never get paid the extra amount of $4,000. The amount of money they have to pay is always larger than the amount they could get payment.

  2. Accept to pay vendors for work not completed. If the contractor agrees to pay his subcontractor $20,000 on 03/25/2020 for the window installation which can not be finished at the end of April, he has underbilled his customer in the period from 03/01/2020 to 03/31/2020. The reason is that he can not make an invoice for the work that he has not completed yet.

  3. Not have updated bills from vendors. A list of vendors paid in a billing period could be a bonus point. For example, per the contractor’s calculation, he has been charged up to 355 of the total project costs, he can discuss with the customer in order to create an invoice with a matching percentage.

  4. Perform unsigned/unapproved Change Orders. Chang order is a giant construction industry bugaboo that could cause major problems if it does not perform properly. Without signing or approval, a contractor could not be paid by customers. That means permanent, unrecoverable under billings. The contractor spent money to complete the change order, but never get revenue to recover all costs for the Chang Orders.

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Conclusion – Underbilling is not a good thing in common

Construction companies need to work and communicate with their customers and accounting staff for planning, controlling, and making decisions during the project. Keeping updated bills from your vendors and discussing with your customer whether you can create invoices and get paid on time. Make sure all of the change orders you performed have been signed and approved. Sometimes, it is alright to underbill your customer. At the end of the project, ensure that you have no net under billings or overbills in excess of 2% of total revenue.

If you, as a business owner, see that you cannot handle accounting on your own, consider hiring an accountancy service for contractors to help you with it. 

Call Irvine Bookkeeping now for a Free Quote!

#lawbookkeeping #ioltaaccounting #reconciliation #trustaccount #smallbusinessmanagement #budget #administrative #bookkeeping #accounting #digitalmarketing  #irvinebookkeeping #managebookkeeping #accounting #la #ca #california

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