The Most Common Accounting Questions My Construction Company Clients Ask Me

If you’re in the construction business, you know that managing the finances of your projects is as crucial as laying the foundation for a building. Here are some of the more frequently asked questions I receive from my construction company clients and my answers.

Q:How should my construction company manage project cost estimations?

A:Project cost estimations can feel like forecasting the weather—unpredictable. But, with the right tools and approach, you can get pretty close to accurate. Start by breaking down your project into detailed tasks and allocating costs to each. Don’t forget to include a buffer for unexpected expenses; they’re part of the job! Regularly revisiting and adjusting your estimates as the project progresses is also key to staying on track.

Q:What accounting software is best for construction companies?

A: When it comes to accounting software, QuickBooks stands out for construction companies. QuickBooks offers features that cater specifically to the construction industry, such as job costing, progress billing, and financial reporting. Plus, it’s user-friendly, so you don’t need to be an accounting wizard to get the most out of it. I myself am a certified Quickbooks Pro Advisor.

Q:How can we improve cash flow management in construction projects?

A:Cash flow is the lifeblood of your projects. To keep it healthy, adopt milestone billing to ensure regular cash inflow. Prompt invoicing and following up on receivables are also crucial. Keep a keen eye on your expenses, and don’t let them run wild. Remember, managing cash flow is about timing—timing your outflows to match your inflows.

Q:Are there specific tax deductions that construction companies can benefit from?

A:Absolutely! The tax code offers several deductions and credits tailored for construction companies. For example, you can deduct the cost of equipment over time through depreciation. Training for your employees and investments in eco-friendly construction techniques might also qualify for deductions or credits. Stay updated on tax laws, or consult with a tax professional to maximize these benefits.

Q:How do we handle change orders in our accounting?

A: Change orders are a fact of life in construction, but they don’t have to be a headache. Document every change order thoroughly and update your budget and project plan accordingly. Be transparent with your clients about the financial implications, and bill for change orders promptly. This keeps your project financially healthy and builds trust with your clients.

Q:What’s the best way to track and allocate job costs?

A: Job costing is your best friend here. It allows you to assign specific costs to projects and tasks, giving you a clear picture of profitability. Use QuickBooks to track your expenses in real-time and allocate costs directly to jobs. Don’t forget to include a portion of your overhead to each project to fully understand its financial performance.

Q: How do most construction companies handle accounting for long-term projects?

A: For long-term projects, the percentage of completion method is often the way to go. This approach matches revenue with the degree of completion, providing a realistic financial picture of the project’s progress. However, it requires careful tracking of costs and project progress. The completed contract method may be simpler but delays revenue recognition until the project’s completion.

A: Can you explain how retainage works in construction accounting?

Q: Retainage is a portion of the contract price deliberately withheld until project completion, ensuring the contractor fulfills their obligations. Accounting for retainage involves recognizing it as a receivable, showing it on your balance sheet, and not as immediate revenue. Once the project is completed to satisfaction, you can bill and recognize this amount as revenue.