Construction is perhaps one of the most unpredictable industries in the United States, and it’s easy to imagine why. Construction development projects take place over long periods of time, making them more susceptible to wage and supply cost increases due to external factors like a booming economy, housing shortage, or government policies that constantly change. These factors create additional challenges for construction businesses to maintain profitability. It is also why maintaining excellent construction accounting records is essential.
Fortunately, software like QuickBooks helps business owners manage their accounting records accurately and easily. When employed properly, the accounting software enables owners to formalize strategies that help them cope with the erratic external factors and business trends associated with the construction industry.
Key Elements of Construction Accounting
Unlike most business functions, construction accounting does not follow a straightforward approach. Many companies rely on sales or services for cash flow and have set overhead costs that do not fluctuate much over time. They’re more likely to only need a one-time template to account for these expenses.
If you’re in the contracting or construction industry, your business depends on securing projects for revenue. Each project includes costs for labor, materials, equipment, and overhead costs such as office expenses, fees, and transportation. Many of these costs are not fixed and may change during the course of the project. However, to submit a bid, the associated costs need to be estimated before the project can begin.
Submitting an accurate and competitive bid requires constant communication between suppliers, contractors, vendors, and legal bodies to estimate the necessary costs for the project.
Additionally, you must factor in your target margins for profitability, estimate risk, and create contingency plans to account for cash flow. Performing this level of construction accounting benefits from robust accounting software that will allow for all of this information to be tracked easily.
Without detailed construction accounting records, it is too easy to miscalculate, which may result in a bid that’s not competitive enough and you can lose the contract to a competitor.
If the bid is too low because you don’t properly account for uncertainty or all expenses, you may yield a slim margin or even prevent your contracting or construction company from breaking even.
As you know, with construction projects your customer doesn’t pay the bid amount upfront in full.
Instead, you create a schedule to maintain positive cash flow during each phase of the project’s plan. These payments trickle down from multiple sources to pay for various expenses throughout the project and don’t reflect negative cash flow until they have been made.
The process requires constant tracking of accounts receivable, income and expenses to devise cash flow reports.
These cashflow reports help plan for the variability of costs in the projects, invoice dispatch and payments, and payroll for labor. Also, if a project is not going to plan, these reports can help you come up with scenarios to reduce overhead costs, remain profitable, or in the worst case, calculate the breakeven point.
Which QuickBooks is Best for Accounting?
There are multiple versions available which can be confusing if you’re trying to choose accounting software for your contract or construction business.
As you know, not all construction companies provide the same services or scope of work, so knowing which QuickBooks version is right for you and what features are most beneficial for your business can make all the difference. Seeking expert help from a QuickBooks ProAdvisor who can assess your construction accounting needs can ensure you get the best product for your business.
Two versions of QuickBooks are available for purchase – Online (QBO) and Desktop. The online version comes in 4 subscription plans: Simple Start, Plus, Advanced, and Self-Employed.
QuickBooks Desktop comes in three options with one-time purchase: Pro, Premier and Enterprise.
|Pros||1,3, or 5 users at a time depending on the subscription||Requires one-time purchase|
|Automated recurring invoices||Allows different companies to be kept separate|
|Access data from anywhere if you have an internet connection||Superior job costing capabilities such as tracking customer, expenses and income, batch invoicing, reporting and budgeting|
|Does not require any installation, backup and integrates seamlessly with many construction management software online.||Tech support is live 24/7 and understands the program|
|Cons||Have to buy a subscription for each new company||Requires QuickBooks server setup for multiple users|
|Tech support not always online||Forced upgrades and only support software that goes back 3 versions|
|Problems converting data to the online version||Errors and bugs|
|Cannot go back to QuickBooks Desktop||Support is not free and can get expensive|
How QuickBooks Helps With Construction Accounting
QuickBooks has established itself as the most widely used accounting software in the market, and for good reason. Here are just a few of the features and benefits that make QuickBooks software a great choice for construction accounting.
Efficient Job Costing
As mentioned earlier, job costing is a crucial part of the bidding process. Accurately estimating costs potentially determines the project’s feasibility or success.
In QuickBooks Desktop, job estimates vs actual details and job profitability details are item based. This allows you to enter all your job-related costs to items instead of accounts, making your estimates vs actuals detail report look simpler and helps when you’re doing line item invoicing for clients.
Items play a much smaller role in QuickBooks online; however, you can avoid a lot of data entry by using bank feeds to import transactions if you aren’t using items to record costs.
Estimates and Invoicing
Estimation is a skill that sharpens with time. QuickBooks makes this easier by retaining all the data for every job. Subsequent project reports can be reviewed to help receive better estimates when working on future projects.
Estimating may become hard to track, especially with any amendments via change orders from the customer. QuickBooks lets you highlight these changes quickly and mention the new estimate, helping you keep track of all invoicing when these costs start rolling out.
With QuickBooks Online, you can build custom invoices and add terms of payment, taxes, and discounts. This helps track awaited and received payments on invoices already sent out.
Payroll can get confusing during construction accounting because of the varying rates of wages for laborers with the added factor of hours worked.
It is easy to run payroll in QuickBooks desktop if you’ve already allocated labor and burden to jobs. All you have to do is run the payroll once the timesheet and cost codes are imported to a job.
Job costing of labor is much more time consuming when working on QuickBooks Online if you need it broken down by cost codes and burden. It depends on the number of employees, jobs and cost codes you have in a pay period.
Job-Wise Profitability Reports
QuickBooks reporting features help retain transparency by keeping track of your budget per project and what expenses need to be incurred.
The job-wise profitability report shows how much you’ve spent vs how much you’ve estimated. It also shows you how much work is completed and what costs you’ve incurred up to that point. This provides a summary for a construction business showing the clients served within a particular period and the earnings for them, giving key insight to focus resources on the most profitable markets.
Easy Integration With Relevant Apps
Construction management software is readily available for businesses to streamline operations. Many of these apps can integrate with QuickBooks Desktop and Online to provide greater productivity and efficiency.
Apps like TSheets, Builder Prime, Buildertrend, and CoConstruct can help manage time tracking, estimating and bidding, coordinating, and communicating. If your construction business is already using one of these apps, you can seamlessly integrate them onto your desired QuickBooks platform.
With all of its features, QuickBooks is an excellent tool for construction accounting when you select the best version for your business’s needs. At times, it can become a bit intimidating, especially when switching from QuickBooks Desktop to QuickBooks Online services. It can also be troubling if the initial QuickBooks setup isn’t optimized for your unique business.
Whether you’re accounting on a cash basis, accrual basis, percentage completion, or the completed contract method, MISSION Accounting can help your construction business choose the correct version of QuickBooks and set it up for your business needs. If you’re already a QuickBooks user and think that your version has limited functions, we can help upgrade it for you. For more information, you can refer to the services we provide, including QuickBooks set-up services.