Managing a Construction Business
Knowing how to manage a construction business is the key to being a successful contractor. There are many ways to enter the construction field with extensive opportunities for a rewarding career in the industry.
The US Bureau of Statistics provides an Occupational Outlook Handbook where you can find entrance requirements, salary, job descriptions, job outlook, and more for the construction industry.
A construction company can be just an owner, an owner using subcontractors, or an owner with employees, with more variations depending on the number of people involved.
There’s more information about running your own construction company in the article called The Lifecycle of a Construction Business.
Carpenters can enter the construction business with a desire to learn and the agility to perform physical work. Hands-on learning in the industry is the best way to prepare for owning and managing a construction business. Score, community colleges, and libraries are good places to learn more about managing a construction business.
Preparing to Own a Construction Business
Learning construction may take 2 to 5 years or longer to have enough knowledge to manage a construction business. Plus, a business or construction certificate or degree will improve your success.
Electricians, plumbers, HVAC, and specialty contractors have additional education and licensing requirements.
Contractor Licensing requirements vary from state to state. Levelset, a cloud-based platform that offers payment facilitation for construction companies, has compiled a Guide for Licensing in each state.
Skills Needed to Manage a Construction Business
As an owner, a large part of the day is talking on the phone and coordinating projects. Sales, customer service, and planning get juggled throughout the day. The day’s filled with interruptions, so the ability to move from one task to another under pressure is essential.
- Being organized
- Construction know-how
- Understanding finances
- Problem-solving ability
- Good time-management
- Great communication skills
Putting time into learning and understanding how to manage a construction business is a great start. Establishing a construction business also takes a financial investment.
The basic setup for a startup construction business:
- Office space
Managing a Construction Business Office
The office is where the behind-the-scenes work happens and where the project begins. It’s where the paperwork for the construction business gets handled.
Basic office setup:
- Cell phone
- Filing boxes/cabinet
- Office supplies
- Accounting software
All the activities of the office are called administrative functions. In a construction business, administrative activities facilitate work on the projects, help the company comply with laws, and support the company’s growth.
- Handling correspondence
- Drafting contract paperwork
- Ordering office supplies, materials
- Product research
- Maintaining technology
- Filing paperwork
Sales functions keep the company operating. Selling for a construction business involves:
- Relationship building
- Understanding the requirements of the project
- Being able to present and finalize contracts
- Meeting with potential customers
- Calculating and writing up an estimate
- Presenting the estimate
- Closing the deal and entering into a contract
Learn more about Establishing Hourly Rates and The Terms Estimate, Quote, Bid, Proposal, Explained.
In a construction business, accounting tracks the company’s finances and the profitability of each project.
- Paying bills
- Paying taxes
- Paying employees
- Preparing financial statements
Human Resource Functions
The laws around employees are extensive, and the paperwork is immense for a construction business. Look to Score and your state Department of Labor and Industry, state Department of Economic Security, and IRS for guidance.
Human Resource Tasks:
- Payroll & Benefits
Here’s some helpful information on Hiring Employees for your Construction Business.
Managing a Construction Business In the Field
The contract outlines the work to be performed. The goal is to complete the project on time and within the budget defined by the agreement.
There are job site interactions with clients, material suppliers, subcontractors, and inspectors. Communication between all people involved is a regular part of keeping the project moving forward to completion.
Scheduling is an integral part of managing a construction business. A forecasted schedule is prepared and coordinated with the homeowners and everyone involved with the project. The anticipated schedule can and often does change; however, the contract can involve penalties for not meeting completion dates.
There is scheduling for:
- Appointments with potential clients
- Meetings with homeowners, designers, architects
- Walk-throughs with subcontractors
- Inspections with city Inspectors
- Labor work schedules
- Material deliveries
Project management is the oversite of all the project’s details; it’s the budget and the labor and materials from beginning to completion.
The budget for the project was determined during the estimating process with a contract agreeing to provide the labor and materials for a specified cost. Project management keeps the project in line with the project’s budget.
Managing a construction business means managing people, budgets, and unplanned obstacles. Many factors play into whether the labor hours will stay within the budget; weather, equipment failures, site conditions, code issues, and a host of other situations.
- Showing up on-time
- Setting up tools and workspace
- Performing work according to the contract
- Cleaning up and packing up
Following safety guidelines is priority one on the job site. For guidance, read Job Safety and OSHA.
- Purchasing materials
- Picking up or receiving delivery
- Making returns
Tools and Equipment
Learn about Cargo Trailer Theft and how you can protect your assets.
Following through is vital to the success of the construction business. Before collecting the final payment, there are a few things to wrap up.
- Final inspections
- Closing-out permits
- Paying subcontractors
- Completing lien waivers
- Thank everyone!
- Ask for referrals
Because history is fun, enjoy these articles, History of Systems for Measuring Length and
Audit-Proof Your Business
Audit-proofing your business requires dedication to the financial paperwork. To have the best outcome for an audit requires a commitment to regularly staying caught up and understanding your tax obligations.
Lagging on the paperwork and disorganization gets business owners in trouble. When business owners take shortcuts or avoid doing paperwork, the mistakes can become a big burden later on.
The best practice to audit-proof your business starts with a knowledgeable accountant and a CPA. Accountants take care of the day-to-day accounting. The CPA is a business partner that will assist your company in staying compliant with tax laws and guide your business planning and growth. Both an accountant and a CPA are very important for audit-proofing your business.
Types of Audits
Internal audits are performed within the company and may be referred to as a self-audit. A self-audit can be performed at any time during the year. The end of the year is particularly important to discover transactions that may be coded incorrectly or were mistakenly entered into the wrong account. An internal audit assures every account is reconciled before preparing the tax return. It also helps to assure that all documentation is collected to complete the tax return.
External Audits assure owners that internal processes are following Generally Accepted Accounting Procedures (GAAP) and industry standards. GAAP principles apply consistent standards to procedures to comply with established rules and regulations.
An external audit helps to identify areas to improve internal controls and regulatory compliance. External audits lend impartial credibility to the accuracy of financial records.
Normal preparation of financial statements by a CPA will not include assurance. The financial statements will not include a formal report to verify the accuracy or completeness of the statements. Financial reports without assurance are intended for the companies internal use.
- Assurance is obtained by obtaining evidence
- Highest level of assurance is an audit
- Level of assurance needed for financing depends on loan size, collateral, and overall risk
- Compiled statements are not audited or certified
- The compilation report includes a letter from the CPA to make the CPA’s role more apparent
- If the CPA is not independent, the CPA must disclose the lack of independence
- Assures financial reports have been prepared following the financial reporting framework
- Used by lenders for financing small amounts
- Performed by an independent CPA
- For higher levels of financing
- Provides limited assurance
- Performed by an independent CPA
- CPA performs verification and substantiation procedures
- Highest level of assurance
A tax return may be selected randomly for an audit or an audit may result because of a “red flag.”
Each year a certain number of returns are randomly chosen to be audited; they are selected by “luck of the draw.”
The IRS uses formulas that compare your return against other returns. The formula looks for normal ranges. If a deduction is not within a range for your business industry and size, the return will be flagged for a manual review.
Reasons your return may be flagged:
- Missing or mismatched paperwork
- Calculation and data entry errors
- Rounded numbers
- Low income with high deductions
- Claiming losses several years in a row
Your return may also be selected because of an audit of another taxpayer’s return if there are transactions connected to your tax return.
The IRS looks for inconsistencies by linking payer records with the recipient records through 1099s. To audit-proof your business, always report all income.
Audit by Letter
IRS letters are sent out about 6 months after the tax returns are filed. The IRS mails the audit letter. They never communicate by email or through a phone call. If you question the legitimacy of an IRS letter, contact a tax preparer or a local IRS office to verify that is authentic. The IRS will send a letter that will have a notice number beginning with CP or a letter-number beginning with LTR located on the top or bottom right-hand corner. You can also contact the IRS at 1-800-829-1040.
Types of IRS Audits
The IRS has three general types of audits:
- Adjustment letters that are sent for miscalculations
- Correspondence audit that will request additional documentation
- Examination audit that looks closer at records
A CP2000 notice isn’t an audit; however, the process is the same. A CP2000 notice is used to inquire about underreported income. The IRS has information showing that you haven’t reported all income on your tax return. Often, it’s for a 1099-NEC, if you are self-employed.
Responding to IRS Audit Notices
IRS notices require a quick response. Don’t ignore IRS notices, respond promptly.
If the notice is correct and you agree, then make the payment or payment arrangements quickly to avoid interest and penalties.
If you do not agree , the notice should be discussed with your CPA to determine how to respond or to determine if representation is needed. Documentation or a letter of explanation may clear up the issue if the evidence is provided to support your figures.
Always send the IRS copies, never send original documents.
- Field audits take place at the taxpayer’s home, place of business, or accountant’s office
- In-Office audits take place at an IRS office
Prepare for the audit. Cooperate with the auditor and provide everything the audit correspondence asks for.
Have documents readily accessible. Neatness helps convince auditors that you are attempting to keep organized and accurate records.
Organize records in a logical order. Keep receipts flat and by date. Paper clip small receipts together to keep from losing. Organize checks by check number and invoices by invoice numbers.
Provide additional backup records with logs and calendars. Auditors will disallow deductions if documentation isn’t provided.
Treat the experience as an opportunity to improve your business.
After the Audit
- Keep track of correspondence with tax agencies.
- Send correspondence by certified mail.
- Stay compliant by filing on time.
Burdon of Proof
All expenses must be ordinary and necessary business expenses. More importantly, can you provide a business purpose for the expense? To audit-proof your business, each transaction must have a business reason.
- Ordinary expense – common and accepted for your industry
- Necessary expense – helpful and appropriate
Obtain, maintain, and retain records
- Records are now commonly available through online accounts
- POS terminals make it easy to retrieve lost and missing receipts from the vendor
Match documentation with every transaction on the bank and credit card statements
- An invoice for every income deposit
- A receipt for every expense
- Bank accounts
- Processor accounts
- Savings, brokerage, reserve, trust accounts
- Credit card accounts
- 1099’s with income
- Income records with bank statements
- Sales tax
- Payroll taxes
A few more tips to audit-proof your business:
- Never mix personal and business transactions
- Avoid cash transactions
- Use accounting software
- Use a mileage app
- File all required 1099’s and W-2s
- Know the rules for deductions
- Keep backup records
Audit-proofing your business requires paying attention to the financials and a partnership with an expert account and CPA. Using this approach to your accounting will provide assurance of accuracy.
Start of the Year for Your Construction Company
Are you ready to start the new year for your construction company? At the top of the list for the start of the year is getting the tax preparation done. If you have employees, you have additional tax deadlines.
Important Tax Deadlines
- 4th Estimated Tax Payment Due
- W-2’s, W-3’s Due
- Form 940 Due
- Form 945 Due
- 1099-NEC, Form 1096 Due
(March 31 for electronic filing)
- 1099-Misc, Form 1096 Due
- Partnership Returns Due
- S-Corporation Returns Due
- C-Corporation Returns Due
- 1st Estimated Tax Payment Due
At the start of the year, an accountant’s responsibility is to compile all of the company’s transactions for the year into reports for tax preparation. All of the income and expenses are reconciled to bank statements. Accountants have a tight timeline between the period when statements are available and when tax returns are filed.
The accountant is responsible for:
- Entering Transactions
- Reconciling Statements
- Making Adjusting Entries
- Closing out the Year
- Compiling Reports
- Payroll and Payroll Reports
After the accountant has made all entries for the year and reconciled statements, a review for accuracy should occur before tax preparation.
There are many options for tax preparation. Tax preparation can be self-prepared, a tax service can be used, or a CPA can prepare taxes. Tax preparation software provides a reasonably priced option for a sole proprietor. However, construction involves complex tax issues, and construction companies will benefit from the expertise of a professional.
Most tax preparers provide a checklist of items needed to prepare the tax return. Here’s a general list:
- Previous Tax Return
- EIN, Social Security Numbers
- Year-End Income Statement and Balance Sheet
- Year-End Banking and Credit Card Account Statements
- Vehicle Information
- Business Use, Mileage Totals
- Loan Documents
- Equipment Information
- Loan Documents
- Prior Depreciation
- Sales of Assets
- Payroll Summary, Payroll Tax Forms
- Estimated Tax Payments Made
- Home Office Information
By now, the end-of-the-year tasks should be completed. Here’s a quick reminder of the tasks on the list.
- Review Accounts
- Set up Tax Appointment
- Make a Budget Projection
- Clean up Receivables
- Purge and File Paperwork
- Inventory Tools and Equipment
- Review Mileage Records
- Review Subcontractor Status and Insurance Certificates
- Clean up Punch Lists and Open Permits
- Touch Base with Clients
With those tasks out of the way, you can concentrate on the upcoming year.
Kick-off the New Year
The end of the year was about getting prepared for taxes. The beginning of the year is an excellent time to organize and prepare for the busy construction season.
- Review Contract Terms
- Update Employee Manual
- Perform Employee Reviews
- Hire Employees
- Improve Safety Program
- Line up Subcontractors
Review Contract Terms
Over time the size and type of projects may change, resulting in the need to revise contracts. It’s always important to watch for situations that may affect the terms of your agreements. Contracts are vital to construction companies. The start of the year for your construction company is a great time to review contracts to determine if the wording meets all the legal protections your company needs.
Update Employee Manual
Employee manuals have policies and procedures that may change over time. Laws are constantly changing and the start of the year is an excellent time to review the employee manual to reflect the changes.
If the company changes employee benefits or plans to make changes, revise the employee manual to reflect benefit changes.
Perform Employee Reviews
Employee reviews are typically done at specific milestones and anniversaries. Add the dates to your calendar for employee reviews to stay on schedule.
You celebrated the accomplishments, looked at the budget, and planned for the upcoming year at the end of the year. If your construction company is in a growth and expansion stage, start planning for the next hire. Along with the employee manual, update the employee welcome packet and onboarding materials.
Next comes recruiting and training. A successful recruiting effort is an ongoing process. Employee retention in the construction industry tends to look like a revolving door. Implement thoughtful recruiting programs and provide quality training. Offer a career path that provides opportunities for growth, as a valuable tools to retain employees.
Improve Safety Program
Improve your safety program by making it a priority. To plan for the year ahead; lay out a calendar of toolbox talks, appoint a safety coordinator and implement the Safe + Sound program. Safe + Sound is a year-round program with week-long events in August.
Line Up Subcontractors
General contractors and subcontractors can establish great relationships and work well together for years. Change is inevitable, general contractors may find the need to widen the net and look for additional subcontractors.
Subcontractors can be found through online searches, trade organizations, or hosting an open house. Develop a process for qualifying subcontractors. Consider compatibility for current projects and future projects.
- Does the subcontractor have the capacity to provide labor and equipment?
- Can the subcontractor schedule labor to accommodate your schedule?
- Does the subcontractor have adequate experience?
- What is the quality of the subcontractor’s work?
- Has the subcontractor worked on similar projects?
- Does the subcontractor have recommendations?
- Has the subcontractor obtained proper licensing?
- Have there been any violations?
Insurance and Bonding
- Does the subcontractor have adequate liability insurance?
- Is the subcontractor bonded?
- Does the subcontractor have a safety program?
- Does the subcontractor carry worker’s compensation insurance?
- What is the accident history of the subcontractor?
Construction companies’ branding and marketing can be done on a reasonably low budget. Facebook and Instagram are perfect, if the pictures are good quality and captioned. Watch for comments and respond professionally. People love short videos.
A website is essential for high-end projects and the pictures must look professional. The website needs a gallery of projects and a well-written “about us.” It requires a description of the type of projects you work on and provide contact information.
Yard signs and advertising on vehicles and trailers are affordable ways to promote your construction company. Novelty items like pens, t-shirts, and stickers are fun way to advertise.
The start of the year will ramp up into a busy spring before you know it. Start now to plan for a successful building season. It won’t seem like a long time, and you’ll be looking back on this year, preparing for the next one.
What Accountants do for Construction Companies
Accountants interpret documents relating to business transactions to produce a picture of the business’s financial health. Accountants, just like contractors, offer different levels and areas of expertise. Deciding on the type of accountant that is best for your construction company depends on your ability to understand accounting and the complexity of your business.
Typically, the more employees, the more complex accounting becomes; however, a contractor using subcontractors, along with having capital assets can also have very complex accounting.
Types of Accountants
- Issue Invoices
- Pay expenses
- Record sales and expenses
- Prepare reports
- Run payroll
- Performs any procedure a bookkeeper performs
- More experience and education than a bookkeeper
- More responsibility for complex situations than a bookkeeper
- Has tax training
- Uses Intuit Quickbooks software products
- Improves skills with Quickbooks training and certifications
- Offers a range of services with remote, online, or in-office options
Certified Public Accountant (CPA)
- 150 hours of college-level accounting
- Must pass an exam
- Maintains continuing education
- Financial advising, tax preparation, auditing
- May serve as an enrolled agent
- Must pass an exam
- Must complete 72 hours of education every 36 months
- Authorized by the IRS to represent taxpayers in tax matters
- Tax planning, tax preparation
- Handles all aspects of payroll
- Ensures compliance
Accounting for Construction
Accounting for construction is complex and involves several types of accounting: financial, managerial, cost, project, auditing, and tax.
When income and expenses are tracked to a specific project, it is known as job costing. Each project is tracked individually for profitability. Financial information gathered throughout the project is used to determine whether there is a profit or loss and used by project managers to estimate potential projects.
Accountants enter information from documents such as invoices and receipts into accounting software and use the compiled data to create reports for business planning and taxes.
Accounting tells the story of the businesses worth and provides information needed to determine credit worthiness, profitability, and for taxation purposes.
An accountant can help an owner understand financial reports and provide them with information for budgeting, loan applications, insurance claims, job costing, and more.
- Invoice clients
- Pay vendors
- Track income and expenses
- Monitor balances
- Track loans
- Track depreciation
- Balance accounts
- Reconcile discrepancies
- Monthly closings
Financial Statements and Reports
- Prepare Income Statement, Balance Sheet
- File sales tax reports
- Prepare budget reports
- Pay employees
- Calculate deductions
- File payroll reports
- Pay payroll taxes
- Prepare tax returns
- Provide tax advice
- Analyze cash flow
- Assist with audits
- Ensure compliance with laws and regulations
Receipts for construction companies may be obtained at the point of sale or received through email. It is now common for accountants to login into an online account to retrieve receipts.
Accountants capture information on receipts and associate it with the proper job. For that, either a purchase order system is used or the job name must be indicated on the receipt or invoice. Typically the purchaser hand writes the job name at the top of each receipt.
Purchase orders typically require a unique number for purchases. A purchase order is a confirmation for the seller to generate an order for a buyer.
If a unique number isn’t necessary, using the job name as a PO number is an easy way to identify a job for job costing.
Tools, materials and supplies, and equipment are often misclassified, but there is a difference.
- Useful life less than a year
- Classified as an expense
- Expected to last more than a year
- Considered a capital asset
- Is depreciated
- Materials and Supplies
- Used to complete the project
- Cost of Goods Sold (COGS)
Incorrect classification affects job costing and financial reports by showing profit and assets to be higher or lower than they actually are.
If you want to know just how precise your accountant is, add a candy bar to your materials, and see if the accountant catches it on the receipt.
Accountants for construction companies review each line item to determine the classification. They decide whether each line item is a job cost, tool, equipment or belongs in another category unless a construction manager has reviewed the receipt and classified the items on it.
Small tools such as screwdrivers that are not “used up” on a project are treated as an expense rather than a Cost of Goods (COGS) materials and supplies. Some items such as saw blades can fall under either category depending on durability and usage. Saw blades with a short life and cannot be re-sharpened are considered COGS materials and supplies, while saw blades that can be re-sharpened and reused are considered a tool.
Purchase tools and equipment separately from materials to avoid incorrectly coding items to projects, which overstates job costs.
Work-in-Progress is an inventory account for projects from development until completion. When completed, the project is moved to the balance sheet and becomes a fixed asset on the chart of accounts.
Think of Work-in-Progress as a way to synchronize the cash flow for long-term contracts. It provides a value for work during a snapshot in time prior to completion.
Work-in-Progress is used to prevent overbilling and underbilling. Work-in-Progress adjusts billing for the percent of completion for sufficient cash flow throughout the entire project; this assures funds to cover expenses at the end of the project.
Accounting may be only a portion of the responsibility an in-house accountant takes on.
In-house accountants may serve as the office manager with administrative responsibilities. They may participate in project development, human resources, and miscellaneous tasks.
In a large construction company, accountants may have specific roles such as accounts/payable specialists, payroll specialists, or supervising other accountants.