What bookkeeping method works best for general contractors?
Accrual basis accounting with job costing works best for general contractors. Cash basis might seem simpler, but it creates problems when you’re billing for work completed but not yet paid, or buying materials for projects that won’t be invoiced for weeks.
With cash accounting, your books show profit or loss based on when money moves. A month where you collected three big payments looks wildly profitable, while a month where you paid for materials and labor but haven’t billed yet looks like a disaster. Neither reflects reality for a contractor juggling multiple active jobs.
Accrual accounting records revenue when you earn it and expenses when you incur them, regardless of payment timing. This gives you a clearer picture of actual job profitability and overall business health. For contractors with annual revenues over a certain threshold, the IRS requires accrual anyway.
Job costing is what separates contractors who know their numbers from those who don’t. Every expense and hour of labor gets assigned to a specific project. This tells you which jobs actually made money and which ones lost it after accounting for all costs. Without job costing, you might think a project went well based on the final payment, not realizing you underestimated labor or material costs.
Track these categories for each job: materials, labor including your own time, subcontractor costs, equipment rental, permits, and job-specific overhead like dumpster fees or portable toilets. Compare actual costs against your bid to see where estimates were off. This information makes future bids more accurate.
Retainage deserves its own tracking. When clients hold back 5-10% until project completion, that money is earned but not received. Accrual accounting captures this as accounts receivable so your financials reflect the true value of work completed.
Work-in-progress reporting matters for longer projects. Knowing how much you’ve spent versus how much you’ve billed on each active job prevents surprises. Some contractors think they’re profitable until they realize they’ve incurred more costs than they’ve billed on several jobs simultaneously.
Most small contractors can handle basic job costing in QuickBooks with proper setup. The chart of accounts and class or job tracking need configuration specific to construction work. Getting this wrong means your reports won’t show useful information.
Many contractors in Metro Detroit try to manage books themselves because they’re used to handling everything. But the same pattern that causes doctors to struggle with their finances applies here too. Just like a Detroit medical billing service helps practices focus on patient care, having someone handle your books lets you focus on running jobs. The time you spend trying to figure out QuickBooks is time you’re not spending on estimates, managing crews, or finishing projects.
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