The Ultimate

Construction
Accounting
Guide
How to Drive
Steady, Profitable
Business Growth

Custom content for Deltek by studioID

Construction accounting
is different from standard
accounting. Therefore, it
requires a different approach.
Construction accounting is complex.
That’s because construction has unique
accounting requirements, processes,
documents and procedures such as AIA billing,
change orders, submittals and RFIs. In addition,
a contractor’s payroll can become complicated
when work extends to multiple states, requires
prevailing wages or involves unions.

So how can contractors improve

construction accounting?
The best approach is to apply construction-
specific accounting best practices and tools.
These give contractors the best chance
for success.

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 “It’s extremely

This guide: important that

• Explains the nine most common accounting a contractor
mistakes contractors make.
understands all
• Covers the five best practices of
the unique aspects
construction accounting.
of construction
• Provides a checklist of action steps for
construction-accounting success. accounting, because

it has a big impact on

their business.”

— John Meibers, Vice President/

General Manager of Deltek
+ ComputerEase

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Nine Common Accounting Mistakes
1. Not tracking committed costs daily. Costs already 6. Not tracking how much equipment,
committed for subcontractors and materials should be tools and other assets are costing.
tracked in real-time to maintain control over a job and At the end of each day, a contractor needs to allocate
keep it profitable. the cost of each asset used on a job (e.g., the cost of
owning, operating and maintaining that asset).
2. Confusing margin with markup. Markup is the
difference between the cost of materials or services 7. Not tracking unposted payroll. Standard
and the price charged. Margin is the gross profit on a job accounting software lacks the ability to track unposted
and is a percentage of the sales price. payroll. However, monitoring these costs in real time
allows you to manage costs proactively by seeing
3. Confusing percent spent with percent complete. the effect of employee hours on the budget without
If you’ve spent half your budget, that does not actually processing payroll.
necessarily mean you have done half the work. You may
have done only 40% of the work, or maybe 60% of the 8. Delayed tracking of labor hours. “You want workers
work. to turn in their time at the end of each day, not the next
day, not a week later,” Meibers said. “Tracking things as
4. Not running frequent WIP reports. With frequent they happen with remote field-to-office tools makes
WIP reports, you can manage work and profit them more accurate.”
proactively using actual job data as opposed to being
reactive to problems that arise. This helps you stay 9. Confusing overbillings with profit. If you overbill by
ahead of the game and optimize profits for every job. $10,000, that is not a cash profit that you can spend.
That amount should be recognized as payment for work
5. Not making WIP adjustments in the P&L that has not yet been completed.
Statement. WIP reports identify underbilling and
overbilling amounts. The accounting staff must enter
these amounts on the P&L Statement and Balance
Sheet to get an accurate financial picture.

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Five Best Practices of Construction Accounting
1. Job Costing
The success or failure of any construction job is based on
profit. Profit margins are razor-thin in construction. Job
costing helps you project job expenses to identify problems
before they affect profit. Can work be completed with the
money and budget available? What are the risk factors on
the job? What do you need to do to succeed?

With job costing, you can accurately predict, record and

control the cost of each job. Your materials, labor,
subcontractors and equipment expenses
are tracked and monitored during the job.
You can see where the money is going as work
is completed so that you can more accurately
predict future costs.

Since job costing is critically important, you should

implement construction-specific software that
supports it. “With standard accounting software, you’re
not going to have a true, robust job-costing system. Your
risk will increase as well because you don’t have a good
tool in place to manage your costs,” said Meibers. “But a
construction-based software system brings all job-costing
functions together, so everything is integrated.”

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THREE IMPORTANT JOB COSTING TERMS “Job costing without frequent

Committed Costs WIP reports is like looking at

Many contractors still do not track committed costs, which can lead
to double billing and mistakes. A committed cost is an obligation the rearview mirror in a car. It
that needs to be tracked. Examples of committed costs could
include an open subcontractor agreement, purchase orders or labor only tells you where you were,
and equipment hours from the field. Using job costing to monitor
committed costs is important because it allows you to see all the and not how to stay on track
costs associated with every project to give you a complete and
accurate picture of the health of your projects. That enables you to moving forward.”
determine, with certainty, the remaining budget you have available for
additional costs.
— John Stenger, CPA, Owner, Managing
Member at Stenger & Company, specializing
Work-in-Progress (WIP) Reporting
in construction accounting
Some contractors create a WIP report only when necessary, out of an
obligation to a bank or a bonding agent. However, WIP reports should
be generated and reviewed frequently and viewed as valuable tools
for running your business. That’s because WIP reports allow you to
manage work proactively to enable smarter decisions midproject and
to deploy resources more knowledgeably by using actual job data.
“A contractor’s financial statement is meaningless without a WIP
statement,” Meibers said.

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WIP Starter Guide There are three common calculation methods to use when
1. Start Small — Start WIP on one job, and calculating WIP and they are the following:

use a minimal amount of job codes.

• Units Complete – Units completed in conjunction with the
2. Champion a Team — Pick a team with a percentage of budget spent.
project manager that gives you the best • Percent Complete – When you don’t have a measurable unit,
chance of success. track progress in comparison to the estimated budget.

3. Pick the Right Job — Pick a job that is • Cost to Complete – Cost to date + cost to finish = your
representative of your average job. revised estimate.

4. Pick a Method — Pick between units

complete, percent complete or cost-to- However, the biggest challenge contractors face when
implementing WIP is getting their organization to think differently
complete.
about projects. WIP is more than just math; it is a culture. Your team
5. Meet, Measure, Adjust — Stick to shouldn’t only use WIP to find out what happened on a job, but
a cadence to meet with your team to rather to plan for what will happen. That requires a way of thinking
where everyone is analyzing and frequently meeting to catch
evaluate progress and make adjustments.
potential cost overruns throughout the job so that changes can be
6. Learn, Improve, Expand — Learn from made to maintain profitability.
mistakes and success alike to take to the
next job or jobs.

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Equipment Costing
Equipment needs to be costed appropriately to understand the
true cost of a given job. Charging the cost of rented equipment
to a job is pretty straightforward, but many contractors struggle
to accurately charge for the cost of the equipment they own.
The best practice is to charge a standard rate that you would
pay to rent the equipment and evaluate your actual cost against
that rate. How do you evaluate the total cost of the equipment
that you own? Sometimes it can feel like a guessing game with
little real data to help you make your equipment-management
decisions. To start, contractors need to track and manage
additional costs as a part of their job costs, such as
costs-to-own (e.g., depreciation, insurance) and costs-to-
operate (e.g., maintenance, fuel, etc.).

Some contractors use a spreadsheet or standard accounting
software to track equipment use. But this requires manual
work, which is time-intensive and prone to errors. Plus, the
data is not real-time and never centrally located in a system
built to handle equipment costing. “In my 34 years of doing
construction accounting, I have seen very few instances where
the spreadsheet method worked,” said John Stenger, CPA, owner
and managing member of Stenger & Company.

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2. Cash Flow Management
Cash flow has always been a top concern for contractors. HOW TO IMPROVE CASH FLOW
Slow invoicing, unexpected expenses and late payments from THROUGH PROPER BILLING
customers can cause serious cash flow issues. Having insufficient
cash on hand decreases your ability to cover operating expenses,
make purchases, meet payroll, build emergency savings and Understanding Overbilling and Underbilling
expand your business. These two commonplace billing scenarios can cause a host of
cash flow problems.
When a construction contract is awarded, the contractor
expends a good amount of time, effort and money getting Overbilling occurs when a contractor bills ahead of work
subcontractors lined up, materials ordered and field crews in completed. If managed properly, overbilling can positively
place. During this busy time, however, many contractors pay little affect cash flow. If unmanaged, it can be problematic because
attention to getting paid. The problem is, waiting until a project contractors will not have the available cash to fund the
is well underway to address cash flow is risky. A single job that is remaining work.
significantly unpaid can ruin your entire year — or even put your
company out of business. Underbilling occurs when a contractor bills for less money than
what was earned for work completed. This can be problematic
So you need to do everything you can to manage cash flow. as well because underbilling can result in negative cash flow
And the best way to do that is with companywide, job-level and numerous other issues. These may include poor accounts
cash flow reporting. Unlike a simple balance sheet, a cash flow receivable management, inaccurate estimating or a large number
report is much more revealing. It shows where each project of unapproved change orders.
stands in its cash cycle and how it affects cash activity for
the company. Both of these scenarios, if not properly accounted for, will lead to
inaccurate financial statements; therefore, it is critical to track and
manage your overbilling and underbilling.

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Leverage Construction-Specific Types of Billing
In the construction industry, there are many different methods
for billing clients. Billing methods may vary based on the unique
conditions of the job. Large projects may require progress billing
typically produced on a form, such as the AIA G702 or G703. Smaller
ones may be on a time-and-materials format. Other jobs are best
handled on a per-unit basis. Below are examples of the three most
common billing types in construction.

1. Progress billing (e.g., AIA) is a specialized billing method in which

a contractor bills for a percentage of the work completed against
the total contract value.

2. Unit billing uses a fixed price per each unit provided (i.e., any
predetermined measurement, such as a foot of guardrail that you
install or a square foot of dirt that you move).

3. T&M billing allows you to bill for your actual cost plus a markup.

The accuracy and timeliness of your billings help you get paid on time
to ensure optimal cash flow.

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3. Construction Payroll Tax Compliance
This term refers to submitting payroll tax payments and related
forms on a certain cadence, as required by law. Contractors face
several challenges unique to the construction industry. These
include prevailing wages, union payroll, certified payroll and dealing
with the complex task of managing varying pay rates.

Performing work in multiple geographic areas also presents a

challenge, because contractors must comply with differing tax
policies. “What’s unique to construction is the transient nature of the
business,” said Chris Pelfrey, Senior Director of Payroll Services at
Deltek + ComputerEase. “A construction company generally has jobs
in different jurisdictions for certain periods of time. And whenever
you cross state lines or city lines, you’re bound by different tax
regulations.”

Pelfrey recommends that contractors do two things: (1) involve the

payroll staff when bidding a job so they can examine the jurisdiction
tax requirements, and (2) equip them with the tools (e.g., software)
they need to perform their jobs well. Not all payroll software will have
the functionality needed by contractors to meet payroll obligations.
Therefore, make sure you have the tools you need to stay compliant.

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4. Field Visibility and Collaboration
Visibility into your field operations will enable you to make business decisions from
real-time information that will drive the most profitable outcomes. Information from
the field could include labor hours, field logs, service work orders, equipment hours,
purchase orders and more.

This field-to-office collaboration is critical; it allows project managers to easily

communicate running labor costs on jobs even before payroll has been processed.
That means project managers and accounting can effectively work together to spot
and prevent potential cost overruns while also leveraging daily updates (e.g., field
logs) that can be used to provide a comprehensive overview and narrative of the day.

Besides improving your ability to make business decisions from real-time field data,
mobile field solutions streamline otherwise redundant, error-prone and paper-driven
processes. Replacing manual field processes will do the following for a contractor:

• Save valuable time that your staff can use to focus on bottom-line activities.
• Reduce errors and delays from information sent between the office and the field.
• Remove the need for paper from your field operations.

When you’re ready to digitize your field operations, make sure you evaluate options
that were built for construction and have the best ability to integrate with the
software you use to manage the back office. With that in mind, it’s possible that
you will realize that the software you use to manage office operations may need to
change to accommodate sophisticated mobile field tools made for construction.
That’s OK. Take it one step at a time.

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5. Effective Document Management
Every contractor knows that creating and managing important
project documents can be a major burden. Examples of project
documents could include RFIs, transmittals, change orders,
submittals, purchase orders, subcontracts and daily field reports.
Construction documentation grows every day as a project
adds new subcontractors, change orders and more. It can be
dangerously easy to lose track, letting important documents slip
through the cracks, causing delays and costing you money. It
could even put you at legal risk.

Comprehensive documentation is essential for every

construction project. The most documented contractor wins.
Yet standard accounting software is not designed to capture
and track project documents with the controls and detail you
need. This lack of control can lead to disorganization, poor
accessibility and inadequate data security.

Contractors need a robust system to track the progress of

project documents every step of the way to ensure timelines
are maintained.

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Key Takeaway
It’s OK if you aren’t following all these best practices today, but that
doesn’t mean you can’t start to consider how you would implement
them. Start small, measure progress and adjust. Focus on progress
versus perfection. At a certain point, one of the most critical factors in
ensuring construction accounting success will be the selection of the
tools you use.

In construction, physical tools and equipment are needed to complete

jobs. However, there comes a time when you take on larger, more
sophisticated jobs that will require different types of tools to get the
job done most effectively. For example, sometimes a backhoe is more
worthwhile than a shovel.

This concept is also true for the software you use to manage jobs. Are
you using the right tool for the job when it comes to your accounting?
That depends entirely on where you are today as a business. Standard
accounting software serves its purpose for contractors in the beginning
of their business life cycle but may not have the level of detail, control
and visibility they will need in the future. It’s not designed for it.

At a certain point, contractors need construction-focused accounting

software with built-in features to manage job costs, committed costs,
progress billing, unit billing, equipment, project documents and field
operations. These solutions help contractors concentrate on the
future state of their construction business, giving them more control
of profitability.

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Action Steps for Construction-Accounting Transformation

Assess Where You Are Today and (e.g., project management). Make sure that the software
Where You Want to Be partner you consider has proven success meeting the unique
Step back and look at your organization based on everything needs of contractors and understands your specific business.
you just read. Are you following all these best practices? This enables smoother communication and ensures that
Prioritize areas in your business you would like to improve. your specific accounting needs will be addressed. “You want
Maybe you haven’t been tracking committed costs or maybe a partner that can evaluate how you’re handling accounting
you would like to meet more frequently as a team to review now, help you determine objectives and then recommend a
WIP. There’s no need to change everything at once. Plan for a consistent process for job costing that makes sense for your
phased approach, start small and then scale to success. Most company,” Meibers said.
important, determine KPIs so that progress can be measured.
These may change over time, but it’s important to establish a Fail Fast and Make Adjustments
North Star for success initially so that everyone is focused on for Long-Term Success
a common goal. When you try something completely new, it’s not going to
be a perfect experience the first time. At first, focus less on
Identify a Software Ecosystem That generating perfect outcomes and focus more on progressing
Will Support Your Goals your processes. Meet frequently with key team members
Do you have the right tools for the job? Maybe you have to identify what is working and, most important, what is not
the right tools for the job today, but what about six months working. Adjust from these learnings, and set new goals
from now or next year? Based on what you would like to for your next meeting. Transforming your construction
accomplish, do you have an ecosystem of tools that will accounting and operations will come with its share of failures,
support your efforts? If you aren’t sure, put together a team but don’t lose sight of your long-term goal and focus. Pivoting
with the task to research and explore options as a part of your from lessons learned and patience will be the key
overall plans. It is important that you include key stakeholders to your success.
and leaders of certain functions outside of accounting

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When it comes to construction job-costing and field-management
software, Deltek + ComputerEase is the right tool for the job. Built
to meet the unique business needs construction companies face
daily, Deltek + ComputerEase has helped thousands of contractors
achieve steady, profitable business growth over the last 35+ years
through construction-focused software.

www.construction-software.com

Click here to learn more

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