Why Do General Contractors Need a Construction Bookkeeper?
Running a construction company is a lot of work - especially when you’re just starting out. You’re responsible for everything. Making sure crews are on time, quality control, payroll, billing, invoicing, paying bills, customer service, estimating, quoting, pulling permits, selling… The list goes on and on.
One of the very first things you should do is hire a professional construction bookkeeper. A lot of times, new business owners say, “I’m not large enough to need a bookkeeper!” This is basically assuming you’re not going to grow your business at all.
Most successful companies grow year over year and one of the things they all have in common is phenomenal bookkeeping. So hire a bookkeeper - and not a friend of a friend, your cousin's sister-in-law’s neighbor, but a professional construction bookkeeper!
Accurate Financial Record-Keeping
It is critical to your business to practice accurate financial record-keeping. When a contractor first gets started it’s not unusual to keep their own books, but as their business grows, new challenges, obstacles, hurdles, and problems arise, and contractors find that they have their hands in too many pots. Bookkeeping is often pushed to the bottom of the priority list and sometimes doesn’t manage to get done until the very end of the month or even worse - all at once at the end of the year. Hiring an experienced construction bookkeeper means you’re never scrambling to keep one of the most important aspects of your business in check.
With Construction Bookkeeping, quality input = quality output, whereas garbage in = garbage out. Categorizing things in the wrong place can create an absolute nightmare and cost you even more money to fix than hiring someone in the first place. Making sure your chart of accounts is set up correctly is one of the most important aspects of bookkeeping. Relying solely on big name software, like Quickbooks or Xero, to set up your chart of accounts is one the worst mistakes you can make. These big box software platforms are not one size fits all, and they’re usually defaulted for product sales. Construction is not at all like product sales, it’s project based accounting. Every job you do is unique and does not have a one size fits all approach. They track multiple individual components to determine profitability. Therefore, it’s recommended to hire a professional.
Just like you might tell your customer, “a bathroom remodel is not a do-it-yourself project”, bookkeeping is the same way!
A lot of contractors figure their profit like this:
Profit = final invoice price - (labor + materials)
The problem with this method is it doesn’t factor in your overhead. You may have made money according to this basic formula, but there are so many different costs not associated directly with the project.
In order to track profitability, you have to track costs. There are two types of costs in construction: direct costs and indirect costs.
Direct costs are directly connected with the construction of a project. Examples include: material, labor, subcontractor and job specific equipment.
Indirect costs are directly related to a construction project. They do not include administration and salaries of staff within the company that are not directly related to a particular project. Examples: overhead, equipment, (tools, trailers, machinery) and indirect labor (like office personal or other employees).
Once you have your cost tracking in order you can determine your true profitability on a job. This can provide a lot of clarity and insights. What you thought was a 30% profit margin, might only be a 10% profit margin.
Invoicing and billing
Finishing a job can be difficult, but getting paid can be just as difficult, if not more! Invoicing and billing are labor intensive processes that chisel away valuable time.
Invoices need to be clear, accurate and sent out on time. They also need to be linked to your accounting software. Follow up is super important and late payment penalties should also be addressed to hold customers accountable.
A construction business owner wears a lot of hats and this is a highly important, time intensive one that can easily be handled by a bookkeeper.
Most contractors can probably agree that taxes are one of the worst parts of owning a business. But what’s even worse is thinking you owe one amount and actually owning an entirely different, potentially much larger amount. Not only that, but you could end up getting audited because of this. If your books aren’t in tip top shape, you might find yourself in the crosshair of the IRS.
One of the advantages of hiring a construction bookkeeper is analyzing business insights. Business insights use your company's data to help make observations and optimize your business. A few key insights include:
Most Profitable Jobs
Find out what your most profitable jobs are and steer your business in that direction. Maybe you’ll decide you only want to take on these types of jobs in the future.
Least Profitable Jobs
Find out if, where and what jobs you’re losing money on. You can decide to fix the problem, or you might find it’s not in your best interest to offer certain services or take those jobs on anymore.
Optimizing Labor Costs
How many crew members do you have on each project? Have you ever driven past a highway construction project and noticed 4 guys not doing anything?
Determine the best way to maximize labor efficiency on each job by adding or reducing crew count on every project backed by your own historical data.
Hiring a Construction Bookkeeper is the Obvious Choice
Hiring a professional construction bookkeeper is the obvious choice for your business. It allows you to focus on the things you’re most passionate about: building and selling more jobs. Bookkeepers pay for themselves in time, value and liability by providing:
- Accurate financial record keeping
- Cost tracking
- Invoicing and billing
- Tax compliance
- Business Insights
If you have any questions about construction bookkeeping, accounting, best practices or want to join our construction bookkeeping community, check out our resources and original content at ConstructionBookkeeping.com