Construction accounting differs significantly from other industries. Multiple projects running simultaneously, retainage, progress billing, and complex job costing make construction bookkeeping uniquely challenging. Here's how to set up systems that accurately track project profitability and keep your Minnesota construction business financially healthy.
Why Construction Accounting Is Different
Construction businesses face unique challenges: • Multiple concurrent projects with different profitability • Long project timelines (weeks to months) • Progress billing and retainage • Change orders and extras • Subcontractor management • Material costs that vary by project • Equipment and labor allocation across jobs
Standard bookkeeping methods don't capture this complexity. You need job costing to understand which projects make money and which ones don't.
Job Costing Fundamentals
Job costing tracks all costs associated with each specific project:
Direct Costs (assigned to specific jobs): • Labor (wages for crew working on that project) • Materials purchased for that project • Subcontractor costs • Equipment rental for that project • Permits and fees
Indirect Costs (overhead, allocated across jobs): • Office salaries • Shop rent • Utilities • Insurance • Marketing • General equipment depreciation
The goal: Know exactly what each job costs and whether it's profitable before it's complete.
Setting Up Job Costing in QuickBooks
QuickBooks Online Plus or Advanced includes project tracking (called Projects). Here's how to set it up:
1. Create a Project for Each Job Projects > New Project • Name: Use customer name plus project description ("Smith Residence - Kitchen Remodel") • Customer: Link to customer record • Start/End dates • Notes: Address, project manager, job number
2. Set Up Your Chart of Accounts Cost of Goods Sold accounts: • Labor - Field • Labor - Subcontractors • Materials - Lumber • Materials - Concrete • Materials - Fixtures • Equipment Rental • Permits and Fees • Small Tools and Supplies
Income accounts: • Construction Revenue • Change Order Revenue • Warranty Revenue
Expense accounts (overhead): • Office Salaries • Shop Rent • Vehicle Fuel and Maintenance • Insurance • Marketing • Equipment Depreciation
3. Always Tag Transactions to Projects When entering bills, checks, or credit card charges: • Select the appropriate expense category • Tag it to the specific project • Add notes about what the expense covers
4. Use Items for Estimates Create service and material items that include: • Description • Cost • Markup percentage • Income account
This ensures consistency between estimates and actuals.
Progress Billing and Percentage of Completion
Construction projects often span multiple months with payment schedules:
Fixed Payment Schedule: • 30% deposit • 30% at rough-in • 30% at completion • 10% retained until final inspection
Progress Billing (Percentage of Completion): • Invoice based on work completed • Calculate: (Costs incurred ÷ Total estimated costs) × Contract price • Adjust for change orders
In QuickBooks: • Create invoice linked to project • Add line items for work completed • Add separate line item for retainage (negative amount) • Note completion percentage in memo
Handling Retainage
Retainage is money withheld until project completion (typically 10%):
1. Track Retainage Receivable Create an Other Current Asset account: "Retainage Receivable"
When invoicing with retainage: • Invoice for full amount of work completed • Add negative line item for retainage held back • Net invoice shows amount due now • Track cumulative retainage in the asset account
2. Release Retainage Upon final completion and inspection: • Create final invoice for retainage amount • Link to project • Mark as "Retainage Release"
Subcontractor Management
Most construction companies use subcontractors extensively:
1. Set Up Subcontractors as Vendors • Collect W-9 forms immediately • Track insurance certificates • Record license numbers • Note trade specialty
2. Track Subcontractor Costs by Job • Enter bills or checks for subcontractor work • Always assign to specific project • Use consistent expense category (Subcontractor Labor) • Match to customer payment schedules
3. 1099 Preparation At year-end, you'll need to issue 1099-NEC forms for subcontractors paid $600+. QuickBooks can generate these if you've: • Marked vendors as 1099 eligible • Tracked payments correctly • Collected W-9 forms
Change Orders and Extras
Almost every project has changes:
1. Document Everything • Written change order signed by customer • Scope description • Materials and labor costs • Pricing • Timeline impact
2. Track Separately • Create separate estimate for change order • Convert to invoice when approved • Tag to same project • Use "Change Order Revenue" income account for tracking
3. Update Budget • Revise project budget in QuickBooks • Adjust percentage-of-completion calculations • Update timeline if needed
Labor Cost Tracking
Labor is often 40-50% of construction costs:
1. Timesheets by Project • Crew members complete daily timesheets • Record hours per project • Note task performed • Supervisor reviews and approves
2. Enter Time in QuickBooks • Use Time Tracking feature • Assign time to projects • Apply burden rate (taxes, insurance, benefits) • Calculate true labor cost
3. Calculate Burden Rate Formula: (Payroll taxes + Insurance + Benefits) ÷ Direct wages Example: $15,000 in burden costs ÷ $100,000 in wages = 15% burden rate
If you pay $20/hour, true cost is $23/hour with 15% burden.
Materials Management
1. Purchase Materials by Project When possible: • Have materials delivered to job site • Code invoice to specific project immediately • Track delivery tickets
2. Track Shared Materials For materials from your shop: • Create inventory items in QuickBooks • Use inventory adjustments to assign to projects • Track minimum quantities • Reorder automatically
3. Reduce Material Waste • Track waste percentage by project • Identify patterns (inexperienced crew, poor estimates) • Adjust future estimates accordingly
Equipment Cost Allocation
Owned equipment represents significant investment:
1. Calculate Equipment Rates For each major piece of equipment: • Purchase price ÷ Expected life = Annual depreciation • Add: Maintenance, insurance, storage • Divide by expected annual hours • Result: Cost per hour
Example: $50,000 skid steer • 5-year life = $10,000/year depreciation • Maintenance: $2,000/year • Insurance: $1,000/year • Total: $13,000/year • Expected use: 1,000 hours/year • Rate: $13/hour
2. Charge Equipment to Projects • Track hours used per project • Apply equipment rate • Bill to project or include in pricing
3. Rent vs. Own Analysis • Compare ownership cost to rental cost • Consider utilization rate • Account for flexibility of renting
Project Profitability Reports
Run these reports regularly:
1. Project Profitability Detail QuickBooks: Projects > Select Project > Profitability Shows: • Total revenue • Total costs by category • Gross profit • Gross margin %
2. Work in Progress (WIP) Report Shows all active projects: • Contract amount • Costs incurred to date • Percentage complete • Remaining budget • Projected profit
3. Project Comparison Report Compare multiple projects: • Revenue per project • Costs per project • Profit margin • Identify most/least profitable
Key Metrics for Construction Businesses
1. Gross Profit Margin by Project Target: 30-35% for most construction work Formula: (Revenue - Direct Costs) ÷ Revenue × 100
2. Overhead Rate Formula: Overhead Expenses ÷ Direct Labor Use this to markup estimates
3. Average Days to Complete Track cycle time from start to substantial completion Identify bottlenecks and inefficiencies
4. Retainage Outstanding Monitor closely - this is your money sitting with customers Follow up aggressively on final inspections
5. Accounts Receivable Days Construction AR should be under 45 days Enforce payment terms strictly
Common Construction Bookkeeping Mistakes
1. Not tracking time to projects Result: Can't calculate true labor cost per job
2. Mixing personal and business expenses Result: Inaccurate project costs and tax issues
3. Poor documentation of change orders Result: Can't collect for extra work performed
4. Not tracking materials by project Result: Can't determine which projects are profitable
5. Waiting until year-end for bookkeeping Result: Impossible to make mid-course corrections
Construction businesses that implement proper job costing systems know exactly which types of projects make money, can price accurately, and grow profitably. Without these systems, you're flying blind - a dangerous place in a competitive, low-margin industry.