Bookkeeping is a critical component of every business, but for construction and trades businesses, it comes with unique challenges that can make financial management especially difficult. Inaccurate financial data or poor bookkeeping practices can lead to cash flow problems, missed opportunities for profitability, and compliance issues that put your business at risk.
Let’s explore the top five bookkeeping challenges faced by construction and trades businesses and how addressing them can improve your business operations.
1. Job Costing Complexity
Accurately tracking and allocating costs to specific projects is crucial for understanding profitability in construction and trades businesses.
However, managing job costing can be complicated.
Each project involves multiple cost categories such as materials, labor, subcontractors, and overhead, which need to be tracked meticulously.
Without a solid job costing system in place, it’s easy to underprice jobs or lose track of where money is being spent.
Solution:
Implementing a robust job costing system allows you to monitor the profitability of each project in real time.
By breaking down costs and revenues by project, you can make informed decisions and identify areas where expenses are exceeding expectations.
Accurate job costing also ensures your business can create more competitive bids and quotes.
2. Cash Flow Mismanagement
Cash flow problems are common in construction due to the nature of project-based work, staggered payment schedules, and unexpected delays. Improper tracking of accounts receivable (A/R) and accounts payable (A/P) can lead to a cash flow crisis, where there’s not enough cash on hand to pay for ongoing project expenses or even payroll.
Solution:
Establish a clear cash flow management strategy that includes setting up payment terms with clients and automating A/R processes to follow up on outstanding invoices.
Regular cash flow forecasting can help anticipate upcoming cash needs and plan for potential shortfalls.
Using bookkeeping software to automate these tasks can also provide visibility into your business’s financial health.
3. Managing Retainage and Progress Billings
In construction, retainage (the portion of payment withheld until project completion) and progress billings (invoicing based on the percentage of work completed) are standard practices that add complexity to bookkeeping.
Tracking retainage can be tricky, as it involves ensuring that amounts are correctly deducted and collected at various stages of the project.
Progress billing, on the other hand, requires accurate project tracking and accounting, often making it difficult for business owners to manage on their own.
Solution:
A specialized construction bookkeeping system can track retainage and manage progress billing to ensure all transactions are accurately recorded.
Having a system that integrates with project management software can help ensure that invoicing aligns with the actual progress of the job, preventing overbilling or underbilling issues.
4. Tracking Change Orders and Adjustments
Construction projects rarely go exactly as planned.
Change orders—additions or modifications to the original scope of work—can significantly impact project costs and timelines.
Tracking these changes and adjusting budgets, contracts, and billing accordingly is crucial for maintaining profitability.
However, many construction businesses struggle to keep up with these changes, leading to inaccurate financial records and lost revenue.
Solution:
Implement a process to document and approve change orders as they occur.
This includes updating job costing and project budgets in real time and adjusting billing to reflect the additional work.
Using bookkeeping software that integrates with project management tools can make tracking these changes much more manageable.
5. Handling Payroll for a Mobile Workforce
Payroll in the construction industry is not as straightforward as in other sectors.
Businesses often employ a mix of full-time employees, part-time workers, and subcontractors.
Calculating payroll accurately means accounting for different pay rates, overtime, and deductions.
Additionally, laborers may work on multiple projects across different states, complicating payroll tax calculations.
Solution:
Outsourcing payroll management to a professional who specializes in construction can simplify payroll processing, reduce errors, and ensure compliance with state-specific labor laws.
An integrated payroll and bookkeeping system can also track labor costs per project, giving you better visibility into project expenses.
Let JL Bookkeeping Design Take the Stress Out of Construction Bookkeeping
At JL Bookkeeping Design, we understand the unique challenges faced by construction and trades businesses when it comes to managing finances.
Our specialized bookkeeping services focus on areas like job costing, cash flow management, and payroll, allowing you to stay financially organized and make better business decisions.
With over 20 years of experience in construction business management, we have the knowledge and tools to help your business thrive.
If bookkeeping is holding your construction business back, contact us today for a free consultation.
We’ll work with you to implement best practices, streamline your financial processes, and set your business on the path to long-term profitability.
