Business

How to Keep Track of Construction Business Expenses

Failing to track construction expenses can lead to many problems, including bankruptcy.
By Garrett Baird
May 24, 2022
Topics
Business

Not properly tracking construction expenses—or failing to track them at all—can lead to everything from late materials deliveries to bankruptcy. As contractors focus on what they’re building, they must make time to properly account for expenses.

The What and Why of Tracking Expenses

Construction bids rely on accurate costs, and construction profitability thrives on accurate budgeting. Inflation will likely affect that in 2022. Contractors hoping to complete projects with available funds and without complaints from clients or lenders will need to be on top of all costs every day.

Every contractor needs to file estimated quarterly taxes throughout the year on the way to paying annual taxes based on the full year. Precision in recording expenses for each project helps with calculating and paying the right estimated taxes. Accuracy also can lower overall tax liability. Without receipts to verify costs, those costs cannot be deducted against revenue for purposes of filing annual taxes.

Beyond that, meticulous recordkeeping provides the data needed for making stronger business decisions throughout the year. A contractor able to rely on real-time figures instead of estimates—or desperately seeking to find those figures on a moment’s notice—can make the fastest and most informed choice about new materials, project alterations and more. Accurate records let contractors plan for workforce-size adjustments when appropriate, make informed lease/buy decisions about equipment or even add new facilities.

Key Expense Categories To Track

A contractor seeking a quick overview of expenses may choose to pay attention to a small, key group rather than work through multiple pages of notebook or spreadsheet data. These categories provide a representative snapshot of money going out in any time period and include:

  • Phone and internet costs;
  • Location costs (such as moving between jobsites and the home office, delivering materials to jobsites and hauling refuse from them);
  • Assets such as vehicles, construction equipment and office equipment;
  • Payroll and related costs, whether for subcontractors or employees (these are complicated and offer the biggest opportunity to run afoul of government agencies because of withholding and reporting requirements); and
  • Business use of non-business property (usually for a smaller contractor using a personal vehicle or dedicating part of a home for business use).

How To Most Effectively Track Expenses

Every construction business should have its own dedicated bank account(s) and credit card(s) to avoid mixing personal and business expenses. Doing so makes it easier to understand cash flow and identify expenses that can be reduced or eliminated.

While a small contractor can track expenses with an accounting lined notebook or a spreadsheet, this is rarely effective. Even hiring someone to manage the books may not be the sole solution (although it can free principals and key employees to spend more time managing the actual construction work and developing new business). In a growing or already-substantial business with many invoices, projects, subcontractors and other expenses to track, a holistic financial management platform—that embraces bookkeeping, invoicing and financial document management—is the most effective method. It frequently comes with default bookkeeping categories installed, precluding the need to build a system from scratch; any categories unique to a business usually require simple edits. Scanning options allow receipts and invoices be processed and worked with immediately. When based in the cloud, such software is accessible from an office and a mobile device. Software that links with business bank account(s) and credit card(s) can even provide insights (for instance, identifying top expense categories) that can be leveraged to maximize cash flow or to drive business growth.

In the end, building a contracting business is not much different than its construction projects. The smoothest projects require a good blueprint, ensure that all of the people and materials come together when needed, and don’t rely on eyeballing the job. No contracting business should toss its paper receipts in a box or store its digital receipts in an email or random computer folder. It is preferable to digitize them into a centralized system that seamlessly matches them to the proper accounting category, banking details and credit-card information. This is the best way to obtain a complete picture of any contracting business.

by Garrett Baird

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