Construction Accounting – Tracking Construction Costs Primer
Tracking costs throughout a construction project is possibly the most important aspect of completing a project. This may seem like a simple function, but in a construction project, different entities need different financial information, and being able to track finances in real time saves a lot of work (and costs) later on.
Construction accounting software makes it easier to keep track of direct material purchases. Direct materials consist of basic building supplies like drywall, wire, pipes, and wood. Essentially, direct materials are everything purchased for a project. Sometimes these materials are purchased tax-free or with a builder’s discount. These items are generally recorded separate of labor costs to ensure accurate profit and loss statements.
The cost of labor has to be tracked apart from direct material costs. Labor costs can include payroll, contractor fees and sub-contractor fees. For employees, tax withholdings need to be kept track of as well as health insurance, payroll deductions, retirement withholdings, etc. Subcontractors are paid in a lump sum with no taxes withheld. So, these need to be kept track of separately. Accounting software has built in features that allow a bookkeeper or business owner to keep track of all of these things. It may even allow you to export information to a payroll service.
Subcontractors and contract workers are a little different as companies are not required to track or even take withholding, but accounting software should also have a feature to allow generation of 1099 forms for work without withholding. As with direct labor or any ledger, this software allows easy review and retrieval of information when the project is finished and again when taxes must be filed.
Construction businesses must keep track of services in a separate category. This need is reflected in most construction management software. Services differ from direct labor because workers performing the work are actually in the employ of another business. For example, workers sent to repair rented equipment or refuel equipment might fall under service expenses. These expenses need to be recorded on their own as a direct expense.
Something that makes subcontractors even more difficult to track is that the bill often includes labor and supplies. This makes it difficult to see exactly where the money is going and look for ways to cut costs. With accounting software, a manager can see that X was paid to a subcontractor who poured the foundation. But it also breaks it down into supplies and labor, so that a manager can discern if there is a better price on materials or if the labor cost was inflated.
All of the above mentioned things can be done using a standard (not industry specific) accounting software like QuickBooks, however, standard software is essentially a blank sheet that can be customized to meet the needs of the business. With a construction-specific accounting software program, the legers and forms are pre-defined – often leaving little room for customization.
Depending on the extent of the construction projects that a contractor is involved in, it still may be substantial work to customize QuickBooks to meet their needs, but then we do have to remember that contractors are used to “building things”.