Construction accounting combines basic bookkeeping principles with project cost management. This (not so) subtle nuance spreads expenses across multiple construction projects, sites, and workers instead of a controlled location or product line like most other industries.
All of these factors can cause irregular cash flow cycles that make profit margins point in the wrong direction. Use this construction accounting guide to get a handle on project costs before they become a financial burden.
Construction project costs refer to any expense associated with building, managing, and completing a particular construction project. Considering most construction companies prefer profitable projects, a job cost management plan has to accurately predict and control cash flow.
Contract disputes, change orders, and construction permits are usually why tracking project costs is so tricky. On top of that, construction contracts usually withhold a portion of the payment until the entire project is complete (known as retainage).
Slow payments and high upfront costs can turn a whole project into a loss unless cash flow is kept in check. Cost overruns can be avoided by understanding the different types of project costs, their impact on expenses, and how to manage project costs for construction.
Materials account for a significant portion of project costs. This includes the price of materials, site preparation costs, and building structure costs. Common construction materials are lumber, cement, steel, and bricks. Site preparation costs involve expenses associated with grading the land, clearing debris, and preparing the foundation. Building structure costs include expenses for assembling materials into finished structures.
How to manage material costs:
Shopping around and negotiating prices with suppliers is an easy way to get a better deal on the cost of materials. Sourcing alternative materials (e.g., prefabricated panelling) can be cheaper and just as durable. Creating accurate material takeoffs and investing in dry and secure storage units can help avoid construction waste and overages.
Labour costs refer to the amount of money paid to workers involved in projects. This includes tradespeople, subcontractors, engineers, architects, and equipment operators. Construction costs for labour can vary depending on the site location, type of project, and level of expertise required to complete the job. Any cost overruns in this area can quickly derail a project's potential to turn a profit.
How to manage labour costs:
Quality labour can be expensive, but paying for reliable workers can curb the cost of change orders and turnover. Cross-training skills can help close the gap in labour shortages and avoid overtime. When estimating labour costs, decide whether a time-and-materials contract or a fixed-price contract is best for the project.
Equipment costs are related to acquiring and maintaining machinery for a construction project. The most common machines used on job sites are excavators, bulldozers, cranes, loaders, and backhoes. Delays in getting equipment on-site or breakdowns can stall project timelines and payments.
How to manage equipment costs:
Properly storing and maintaining equipment will help avoid breakdowns and repairs. Alternatively, renting construction equipment reduces upfront costs and eliminates routine maintenance. Financing is another option that offers flexible payments versus buying equipment outright.
Overhead project costs are routine expenses related to running a construction business. These indirect costs include employee wages, utility bills, office rent, insurance premiums, construction permits, legal fees, and any other expenses that aren't tied to a specific project or job. High overhead expenses and incorrect calculations are usually behind narrow profit margins.
How to manage overhead costs:
Calculating project bids puts a price on overhead costs upfront to get a sense of returns on a job. Having policies for collecting and receiving payments will help improve cash flow and reduce unnecessary interest charges. Outsourcing administrative or accounting tasks can also alleviate some overhead costs by not paying for full-time salaries or benefits.
Construction project costs can add up quickly. Accurate job costing and expense tracking will help keep project costs from fluctuating too far outside of construction budgets. Outsourcing Fractional Accountants is a great option for managing day-to-day construction finances without a full-time commitment or cost.
Book a free consultation to learn how Fractional Accounting for construction can help manage project costs.
