QuickBooks Tip – Working With Contractors – Part 2
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.
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.