While it is a huge help for construction accounting, QuickBooks is a complex third-party app that requires expertise to operate. It’s contrary to what business owners like you assume — that accounting will no longer be a problem with QuickBooks because it can handle all the financial matters. You think it would be as easy as inputting all your financial data and then letting the software do all the work. And at the end of the day, you expect it to spit out the correct numbers and move on with fool-proof calculations. What you may not be anticipating is the challenging technical aspect of it.
Businesses in the construction industry like yours will find QuickBooks highly beneficial but complicated if you don’t have the training and experience. It’s pointless to find an alternative accounting app that could cost you tens of thousands of dollars, yet you still have to make adjustments.
Dealing with construction accounting with QuickBooks and a CPA who knows how to operate the software and look at the information from an expert’s lens is the solution for your accounting needs.
Is QuickBooks Really the Best Accounting Software for your Subcontractor Construction Business?
Standard accounting methods don’t work well with construction businesses, since it involves a lot of processes. First, you get a project. Then you create a contract, and bill a 50% down payment. Next, you buy the materials, organize your labor pool, and so on until the project is done.
This handful of work needs some heavy-duty accounting software designed for the construction industry but they cost way too much money for a small subcontractor business like you. Even if you have saved enough to afford one, you are running a business and you need to spend your money wisely.
For construction accounting, QuickBooks is the best option for small general contractors. Price-wise, it’s more cost-effective than the expensive choices out there. Your challenge would be to set it up and operate it according to your needs, which is what you are supposed to be doing with other third-party accounting software anyway.
Remember that accounting plays differently in the construction industry. There is volatility in the cost of materials and overhead, which affects the cost of a project. Even after accounting for these expenses, you still don’t know whether you made your profit.
Accounting Methods to Track Your Profits and Manage Your Finances
Several accounting methods can help you manage your financials and track profit, jobs, progress billing, and cash flow within QuickBooks for construction industry. Take note that you can only change your chosen method with the IRS’s permission, so you must thoroughly understand each method. It’s also important to seek the assistance of a good financial advisor and CPA to determine the best method and then set the processes for the accountant to follow.
The three accounting methods are:
Completed Contract
Most bookkeepers/accountants use the standard accounting method known as “cash” or “accrual”, but it is not ideal for the construction industry. The best method for the construction industry is the completed contract method (CCM). Here, the reporting of expenses and income comes after the project is completed. It works well for the construction industry because of the unpredictability of costs.
It requires more work though than just using the standard accounting method, such as using journal entries to get accurate results. An average accountant with no experience in the construction industry may find this challenging to look at.
Specs or Specific Identification Method
With the specific identification method, you need to keep track of and assign cost for every item in the inventory. Here, you employ the FIFO (first in, first out) and LIFO (last in, last out) calculation methods. This can be done manually or by using an electronic tracking system.
Specs is similar to completed contract but the ‘coding’ looks different on financials. When a spec gets purchased part way through completion, then it just works like a completed contract.
Percentage of completion
Percentage of Completion involves a period-by-period or work-in-progress reporting. It uses percentages to recognize the expenses and revenues of the completed work during the project period. For example, 50% of the project should be complete by year one and the remaining 50% by year two.
Percentage of completion is the best method for construction businesses that have ongoing or long-term big-ticket projects such as public or private infrastructure, energy facilities, and the like. However, it is a long process to get everything accurately set up in QuickBooks. This will require work outside of QuickBooks or any accounting applications. It is also required for GAAP (generally accepted accounting principles).
What is GAAP?
Prepared by the Financial Accounting Standards Board (FASB), GAAP is a set of accounting standards that helps keep a company’s financial information reliable and accurate. Some states require its 10 key principles include:
- Principle of Regularity
- Principle of Consistency
- Principle of Sincerity
- Principle of Permanence of Methods
- Principle of Non-Compensation
- Principle of Prudence
- Principle of Continuity
- Principle of Periodicity
- Principle of Materiality
- Principle of Utmost Good Faith
It’s a way of easing the process of comparing financial statements of GAAP-compliant companies and ensuring the accuracy of these data. In turn, company owners, stakeholders, and investors can make sound decisions and strategize their business options.
Construction Accounting, QuickBooks, and a CPA: Can Your Business Survive Without These?
Proper accounting is an integral aspect of any business. Since the construction industry involves unstable prices and varying expenses, it needs a specialized accounting process for accurate results. QuickBooks is a great tool to address your accounting needs but it needs to be set up properly. At first, it can be easy to use. Then it becomes more challenging as your business grows.
Over time, the numbers and processes become harder to understand that using QuickBooks is more of a bane than a boon. These complexities will likely scare you or your bookkeeper, but a CPA can help save the day.
How a CPA Can Help QuickBooks become MORE Efficient for Subcontractor Businesses
As a construction business owner, your expertise lies in scoring projects and not in numbers, so you hire a person to take over accounting or bookkeeping for you. If that person doesn’t know how to work QuickBooks for construction accounting, you need a CPA for this task.
A CPA can:
- Understand and analyze your finances in general by setting up your QuickBooks specifically for your business.
- Help you predict future trends and project financial goals based on your finances and operations.
- Help you establish the best way to calculate your bids so you are profiting from the jobs you take without working into burnout.
- Provide you with an accurate financial picture of what you are making in your business, which QuickBooks can’t provide alone.
- Help you decide the best way to determine how you are going to predict your finances – is it through percentage of completion or a completed contract?
QuickBooks for construction businesses can be a handful for someone without proper training or experience in using it. On the contrary, a CPA can very well take care of the rest for you. You can use QuickBooks Online or QuickBooks Desktop. The choice is up to you if you have a background in how each operates. However, most CPAs advise business owners to start with QuickBooks Online, which has good features for importing transactions. Although your financial information may not be coded correctly, at least they are already in the system, which is half the battle. Either way, the online and desktop versions need to be tweaked so you get the results you need.
What Made QuickBooks Different and the Best Option for Your Construction Business?
The “perfect” accounting software for construction contractors does not yet exist. In construction accounting, QuickBooks is undoubtedly the best available tool that can make your life easier than doing things manually. However, just like any accounting tool, it will need tweaking according to your specific needs. A CPA can help you set QuickBooks up correctly and at the same time work on your financial records to ensure that everything is in order. With the help of a CPA, your QuickBooks for construction business will function more efficiently leading to a healthy and steady cash flow. This is what SJ Wick & Associates, P.C. does best.
We have a team of QuickBooks-savvy CPAs who specializes in construction accounting, ready to properly set up your software and ensure that it runs smoothly and accurately. Further, we also offer payroll and tax preparation, accounting, bookkeeping, and financial consulting services to help you advance in the construction industry.
If you need help with your QuickBooks set-up or any accounting matters, you can call SJ Wick & Associates, P.C. anytime for assistance. Contact us today!
