The word “contractor” is a vague and widely misused term which cover everyone from the local handyman who makes repairs/improvements on your house to the contractor who is building or repairing a bridge on your local highway.
Who are contractors?
Understanding the different types of contractors and the roles that they play in the construction industry will enable you to realize just how different their QuickBooks accounting and compliance needs will be. “Contractors” are “construction-related” businesses including:
- Your “local handyman” – who is a jack of all trades and does a little of everything. He will work on various “jobs” for private homeowners and usually bills on a Time & Materials or Cost Plus basis.
- General/Prime Contractors – A general contractor will take full responsibility for the completion of the project, often times subcontracting out a substantial part of the work, while maintaining overall control through Project Managers and on-site supervision.
- Construction Managers – Generally, a construction manager does not perform actual construction work on a project; rather they act as an agent for the project owner. A construction manager may be hired in lieu of or in addition to a general contractor. As an agent, the construction manager coordinates the actual construction project, but has no contractual relationship with the subcontractors.
- Commercial Contractors - Commercial contractors specialize in commercial construction projects which may require the submission of AIA Billing invoices in order to be paid and include the construction of a single building or any number of buildings including:
- Retail Projects – shopping centers, restaurants, grocery stores
- Rental Facilities - office buildings, industrial parks, apartments
- Business Locations - company headquarters, manufacturing plants, insurance companies
- Municipal Buildings - city halls, prisons, schools, hospitals
- Special Projects - amusement parks, race tracks, coliseums, churches
- Residential Contractors (Custom Home Builders, Remodelers, Property Rehabilitation) – A residential contractor specialized in the construction of single family homes, duplexes, etc., usually buildings for resale to one or more individual homeowners.
- Commercial Project Owners - The owner of a construction project may be an individual, corporation, partnership, or government body who evaluates whether a project is feasible and will provide the future benefits desired. The owner will then hire an architect or engineer to design the plans and specifications of the project. Normally, the owner will obtain necessary financing for the project for both the construction period and permanent financing upon completion, if applicable.
- Residential Construction Developer (Spec Home Builders, Land & Lot Developers) - A residential construction developer is usually the owner of the residential development as well as the builder. The developer usually acquires the land, obtains approval, secures construction financing, and begins construction of the residential development in stages or phases of construction. The initial phase is sold, and the construction process begins on the next phase. This process requires that the builder allocate a per-unit cost to each unit sold.
- Subcontractors - Subcontractors include specialists, such as plumbers, electricians, framers, concrete workers, etc. They are distinguished from the general contractor by a limited scope of work, which usually involves a specialized skill, knowledge, or ability. Subcontractors enter into construction contracts with general contractors, and they may provide the raw materials used in their specialty area. The general contractor, not the project owner will pay the subcontractors. Materials which are purchased by the subcontractor are usually delivered directly to the job site. A subcontractors’ work may be completed in stages, or it may be continuous.
- Highway Contractors - Highway and street contractors require specialized equipment and techniques. The equipment that they own may include bulldozers, graders, dump trucks, and rollers. Highway construction projects can include city streets, highways, country roads, highway bridges, and tunnels and will require the submission of certified payroll reports.
- Heavy Construction Contractors - Heavy construction contractors require large and complex mechanized equipment, such as cranes, bulldozers, pile drivers, dredges, and pipe-laying machines. Some examples of construction projects in this category include dams, large bridges, refineries, petrochemical plants, nuclear and fossil fuel power plants, pipelines, and offshore platforms; many of which require the submission of certified payroll reports.
- Architect/Engineers - An architect or engineer designs the plans to be used by the construction contractors, these plans provide the necessary details (dimensions, materials to be used, location of fixtures, etc.) to the contractors. When the project is started, the architect/engineer may monitor the contractor’s progress and often approves progress payments (using AIA Format) to the contractors.
- Material Suppliers – Material suppliers provide the raw materials used in the construction project. Material supplies are purchased by the subcontractors and installed by them in accordance with their contract. General Contractors often write joint checks to subcontractors and material suppliers to ensure that all parties have been properly paid.
- Construction Lenders - The construction lender provides the necessary funds to pay contractors on a progress basis. As construction work progresses, the construction lender will advance funds based on the work performed or based on a payment schedule – usually in the form of AIA billing.
- Surety Companies – Sureties are usually insurance companies who provide bonding to contractors; bonds provide a form of insurance to the owner. Performance bonds protect the owner if the contractor fails to complete the construction work.
Knowing the differences between the type contractor your QuickBooks client or potential client is – will help you to design an effective accounting system for his business.
An infusion of federal infrastructure funding through the American Recovery and Reinvestment Act (ARRA) have had and will continue to put more contractors and their employees back to work. Federal investment in Public Works projects will create jobs throughout the country and not just construction jobs.
While additional public infrastructure projects will allow the construction industry to maintain their current workforce and will even necessitate hiring more workers. You will also see contractors who have previously worked on other types of construction projects (residential and/or commercial) begin bidding on newly created Public Works projects.
This will also encourage contractors to purchase equipment, thus preserving and creating manufacturing jobs.
As a Certified QuickBooks ProAdvisor or Accounting Professional who is working with construction clients – you are entering into a very challenging experience!
More demand for construction savvy accounting professionals.
Contractors who will perform work on these government funded public works construction projects will face new bookkeeping, accounting, and compliance issues that they may not have faced before, therefore, they will be seeking help and advice (aka consulting time) from construction savvy accounting professionals who support QuickBooks – specificically in the areas of improved job costing and the preparation and submission of certified payroll reports; which are required on government funded construction projects valued over $2,000.00.
The terms “construction and contractors” are vague and widely misused terms which cover everyone from the local handyman who makes repairs/improvements on your house to the contractor who is building or repairing a bridge on your local highway.
Let’s talk about construction projects
In general, there are three types of construction projects that contractors can be involved in, each having their own unique accounting and compliance issues:
- Non-Residential Building which includes the actual process of building, creating, or repairing commercial, manufacturing, educational, religious, administrative, recreational, hotel, dormitory, and other actual buildings. These types of project may require the submission of AIA format billings and/or certfied payroll reports – in order for the contractor to be paid.
- Residential Building which includes the actual process of building, creating, or repairing single family homes, multi-family homes, and apartments and other buildings of this nature. These types of projects may require the submission of AIA format billings – in order for the contractor to be paid.
- Heavy/Highway, Industrial, or Non Building construction which includes the building or repair of streets, highways, bridges, dams, reservoirs, river and harbor developments, sewage and water supply systems, missile and space facilities, airports, utilities, public works projects, and communication systems; just to name a few. These types of projects may require the submission of AIA format billings and/or certified payroll reports – in order for the contractor to be paid.
AIA format billing is a “standardized” method of billing developed by the American Institute of Architects.
Many contractors across the United States are subject to the Davis-Bacon Act – including a growing number of small, medium, and large construction firms as a result of the American Recovery and Reinvestment Act of 2009 (ARRA).
ARRA provides billions of dollars in funding for the improvement of the nations’ infrastructure that in turn created a slew of new government-funded construction projects requiring certified payroll reporting.
According to USASpending.gov, as of November 23, 2009, there was $43.9 billion in spending targeted for the “construction of structures and facilities.”
A U.S. Federal Law, the Davis-Bacon Act of 1931, set “prevailing wage” rate requirements on public works projects. All contractors and subcontractors who engage in government construction contracts and federally assisted construction projects over $2,000.00 are required to submit weekly – certified payroll reports to ensure government compliance.
What is a “prevailing wage”?
- Determined by the U.S. Department of Labor
- Based on wages for the area (including Union wages) in which the project will occur and the type of construction
- Prevailing wage rates differ based on the type of work the employee performs and their level of skill
- Can change by city, county, or job
- Prevailing wage rates include BOTH an hourly wage rate PLUS an hourly fringe benefit amount
- Can be more than what you currently pay your employees
What is the “hourly fringe benefit amount” and HOW is it paid?
- Specified dollar amount in ADDITION to a base hourly rate of pay
- Can be paid:
- To the Union on behalf of the employee
- To a “bona-fide” fringe benefit plan
- In cash to the employee as part of his/her gross hourly rate of pay
- The total hourly fringe benefit amount can be “split” between a bona-fide plan(s) with the balance paid in cash to the employee
What is a certified payroll report and what makes it “certified”?
- Specially formatted payroll report consisting of the actual payroll report and a certification page
- Must be submitted on a weekly basis
- “Certification” is obtained via an ORIGINAL SIGNATURE of a company official
Is there a single, standard certified payroll-reporting format or form?
Not really – it will depend upon the state in which the construction project exists and if the project is funded with Federal or State money.
- 24 states follow the reporting rules of the U.S. Department of Labor – Wage and Hour Division and require the filing of the Federal (USDOL) Form WH-347.
- 13 States have their own State Prevailing Wage Laws and forms OR can require the WH-347 form when a job is funded fully by federal dollars.
- 13 states have multiple State Agencies issuing Prevailing Wage Laws and forms, multiple compliance companies, electronic certified payroll reporting requirements OR can require the WH-347 form when a job is funded fully by federal dollars.
In addition to a weekly-certified payroll report, are their other reports that are required?
Absolutely! It is a common misconception that all you have to do is submit a certified payroll report for each week that you work. Additional reports include:
- “No Work” Performed Report for weeks in which you have no employees on the job site.
- Union/Bona-fide Plan Fringe Benefit Reports – on a monthly basis.
- Union Dues Reports – on a monthly basis.
- Federal, State, or Local EEOC/Workforce/Manning Reports – on a weekly, monthly, or annual basis (depending upon the State that the project resides in).
- American Recovery & Reinvestment Act (ARRA) Reports – on a monthly basis.
How are contractors who use QuickBooks complying with prevailing wage reporting requirements?
- Complex Excel spreadsheets which are manually updated each week
- Use of the “alternate, substitute” certified payroll report (found in QuickBooks Enhanced Payroll and used with Premier or Enterprise Editions)
- Stand-alone software programs which have no QuickBooks interface and require double-data entry each week
- Through the use of QuickBooks integrated applications, specifically designed for compliance with prevailing wage requirements.
As we all know, having an accounting system is a vital piece of any successful business. An accounting system provides an automated and easy way to track how much money is being made vs. how much money is being spent.
Creating proper accounts in an accounting system to track business Assets, Liabilities, Equity, Income, Cost of Goods Sold, and Expenses will allow your construction client to see an overall picture of their company’s worth or value from a financial standpoint – not only for themselves, but also when they apply for a loan, or have to be bonded.
A construction company, like any other company, has numerous responsibilities – to their employees, customers, vendors, subcontractors, investors, and even the government.
Contractor Business Needs:
The construction industry has some very specific accounting requirements. In addition to Payroll, Accounts Receivable, and Accounts Payable functions, they need to be able to have systems to handle Estimating, Job Costing, Overhead, Billing and/or Invoicing, Project Management, Scheduling, and Customer Management – just to name a few.
No two contractors will have the EXACT same need for functionality OR use the exact same cost coding system for billing. Even if two construction companies are similar (for example, two plumbing contractors), a bookkeeping system may need to be modified to meet the needs of each business. A bookkeeping system should be designed to meet the needs of each business, keeping in mind that it should not be overly complex and should take into consideration:
- the types of transactions the business enters into and how information about those transactions can be captured, and
- the type of financial information the business needs to efficiently manages its operations
So, do not let anyone tell you that every contractor uses a specific Chart of Accounts or Cost Coding system.
A typical construction specific accounting program (which carry a big price tag) includes:
- Accounts Payable
- Job Cost Management
- Accounts Receivable
- Payroll – including Union Payroll, Certified Payroll, Union Reports
- Detailed Job Budgets
- Flexible Billing modules – including Time & Materials billings, AIA billings, Over & Under Billings
- General Ledger
- Subcontract status
- Custom job reports
- Purchase Orders
- Inventory
- Equipment Tracking
- Work in Progress
- Retainage Receivable
- Retainage Payble
- Construction Loans
There are many software packages available for the construction industry – ranging from $5,000.00 to $50,000.00 in price with expensive annual updates, that do not include support. Because of this, especially in this tight economy, more and more contractors are switching to QuickBooks Pro, Premier, or Enterprise to fulfill their bookkeeping and accounting needs.
QuickBooks, while not specifically developed for the construction industry is:
- extremely user-frindly
- can provide a very strong accounting structure “backbone”
- can be operatoed by personnel who have little computer knowledge (bookkeeping and accounting knowledge, however, is important – you need to know your “debits from your credits”)
- with the use of reasonably-priced QuickBooks integrated applications to provide some of the higher level functionality
QuickBooks, when used in conjunction with 3rd party integrated applications, is a viable and cost-effective choice for contractors.
