Running a construction business involves managing multiple projects, tracking materials, and paying employees—all while staying profitable. Without a solid accounting system in place, it’s easy to lose track of cash flow, miss tax deductions, or end up with financial headaches at the end of the year.
If you’re looking to set up an accounting system that keeps your construction business organized and financially healthy, this guide will walk you through the key steps.
1. Choose the Right Accounting Method
Construction businesses typically use one of two accounting methods:
🔹 Cash Basis Accounting – Income and expenses are recorded when money changes hands. This method is simple but may not provide an accurate picture of profitability for long-term projects.
🔹 Accrual Basis Accounting – Income and expenses are recorded when they are earned or incurred, regardless of when cash is received or paid. This method provides a clearer financial picture, especially for larger projects.
For most construction businesses, accrual accounting is the better option because it aligns revenue with expenses over time. In some cases, the IRS even requires it for businesses with more than $25 million in revenue.
2. Use Accounting Software That Fits Your Needs
A reliable accounting system starts with the right software. Construction businesses need tools that can handle job costing, invoicing, and payroll. Some popular options include:
✅ QuickBooks Online – Great for small to mid-sized construction businesses; integrates with payroll and project tracking.
✅ Xero – A user-friendly alternative for managing expenses and invoices.
✅ Sage 100 Contractor – Designed specifically for construction companies needing advanced project management features.
✅ Foundation Software – A powerful solution for large construction firms with complex accounting needs.
Choosing the right software depends on your business size, project complexity, and budget.
3. Set Up Job Costing to Track Project Profitability
One of the biggest financial challenges in construction is knowing how much profit each project actually makes. That’s where job costing comes in.
What is Job Costing?
Job costing tracks all expenses related to a specific project, including:
- Materials (lumber, concrete, fixtures, etc.)
- Labor costs (employee wages, subcontractor payments)
- Equipment and tools
- Permits and insurance
By accurately tracking these costs, you can:
✔ See which projects are the most profitable
✔ Identify where you’re overspending
✔ Adjust pricing to improve margins
Most accounting software has built-in job costing features, but they need to be set up correctly.
4. Establish a Clear Invoicing and Payment Process
Getting paid on time is critical for cash flow in construction. A strong invoicing system should include:
✔ Clear payment terms (e.g., Net 15, Net 30)
✔ Upfront deposits for large projects
✔ Automated invoicing through accounting software
✔ Tracking unpaid invoices
Consider using online payment options like ACH transfers or credit card payments to make it easier for clients to pay.
5. Separate Business and Personal Finances
Mixing personal and business finances is a common mistake that can cause tax issues and complicate bookkeeping.
To stay compliant and organized:
✅ Open a separate business bank account
✅ Use a dedicated business credit card
✅ Pay yourself a salary instead of withdrawing random amounts from the business
This separation not only makes tax time easier but also gives you a clearer picture of your company’s financial health.
6. Track Cash Flow and Plan for Taxes
Many construction businesses struggle with cash flow due to delayed payments or unexpected expenses. Keeping a close eye on your finances can prevent shortfalls.
📌 Best Practices for Managing Cash Flow:
- Monitor cash flow weekly
- Set aside money for taxes each month
- Use a cash flow forecast to plan for slow seasons
- Have a line of credit as a backup
Additionally, make sure you’re setting aside enough for quarterly estimated tax payments to avoid IRS penalties.
Your Competitive Advantage: Working With a Construction Bookkeeping Firm
Setting up a strong accounting system is essential for running a successful construction business. From choosing the right accounting method to tracking project costs and managing cash flow, each step plays a crucial role in your financial health.
If you want expert guidance in setting up or improving your accounting system, we are here to help.
👉 Schedule a free consultation today with William Copeland at Copeland Bookkeeping and let’s get your construction business on the right financial track!
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