In accounting, the first piece of the confusion comes from Construction Accounting Vs. Regular Accounting. Not everyone knows what construction accounting is, and easy to assume all accounting is the same.

Why is there confusion? From a tax standpoint, most construction projects are all lumped together, and after the Cost of Good Sold, Expenses, and Depreciation, you either made money or didn't. The Tax Accountant rolls up the numbers to compete for the annual tax return. Therefore, if the information is not needed to be broken down for taxes, then the Tax Accountant is not concerned.

As the Construction Contractor paying the bills, you are constantly concerned about which jobs are "Making Money or Losing Money." "Why does it seem like I am watching the money fly by and zooming out of my checking account? It never seems like there is any money left over!"

Second, confusion always comes about the material. A construction contractor may purchase material and resell it to their customer. Thereby thinking it is a reimbursable expense. (You lose money when doing this). 

Remember all invoices to the Customer (Retail, General Contractor, Spec Builder, Developer) are income. Every line item on a customer invoice is All INCOME. If the words are on the invoice, then the invoice is either taxable or non-taxable based on other factors. Washington State, for instance, has a clear explanation. 

Purchases for the material are Cost of Goods Sold or are expenses if you are short-cutting your accounting. I have seen financial statements that are backed out because they will reflect reimbursable income as a negative number and thereby show it as a deduction. (The net effect is double dipping on the expense side) The cause is the accounting software not correctly set up. 

New Construction Home Building is another area of confusion. In the mind of many construction contractors, a Spec home is any new house being built for resale. That is true; it is a New Construction House. It is a Spec Home for the Owner and Developer (who might be the General Contractor running the job). The question is on the construction accounting side. 

The question to be answered is "Who owns the house?" - It is a Spec House in the accounting system for the owner. For the General Contractor who is building a New Construction Home for a Developer, it is NOT a Spec Home. Why might it seem the same as both are New Construction Houses?   

If the General Contractor Does Not Own the house, then from an accounting side for that specific General Contractor, the house is a Custom Home with an owner who is not The General Contractor. 

Recognize expenses when the house sells. If the General Contractor, Developer Owns the new House being built, then it is a Spec House in the Accounting System. All costs roll up into WIP (Work-In-Process) and convert to COGS when the house is sold, not before. Otherwise, expenses one year; sales the next equals taxes.  

In Washington State: 

• All Construction Contractors working for a Spec Builder must collect sales tax on all services (labor and material) when billed from the General and Trade Construction Contractors.

• All Construction Contractors working on Custom homes, Residential or Commercial Projects, Large or Small Remodels, and Handyman Projects can accept reseller permits from the General Contractor. Sales Tax is billed and collected from the Owner by the General Contractor. 
  
• Contractors must collect sales tax on all retail projects, including Labor, Materials, Other. Sales tax must be collected on every line item. Customer Discounts can be given for any reason.

Fix the giant boulders one at a time. Get that one thing working, then move on to the next one. What is the most annoying thing you can quickly fix? We talk about accounting because that is our primary focus.

Start with the basics:

• Open a business checking account.
• Use a dedicated credit card for the business (if using a personal card).
• Create invoices, present them to your customer, collect the money and get it in the bank (Do you have an easy way for your clients to pay you?).
• Collect the money ASAP because, without cash flow, you are out of business.

No - the company with the most Accounts Receivable or Accounts Payable does not win a prize.

• Accounts Receivable means your customers owe you money.
• Accounts Payable means you owe money to your suppliers.
• Net Profit is the money left over. You want lots of Net Profit!
• You are not a banker! Stop borrowing money using your credit cards, Loans, and Lines of Credit, then finance customers' projects at 0% interest.

Final thoughts

Money makes the business world go round. Unless you provide a service that others are willing to pay for, you will not collect money to use for goods and services you want. It costs you money when you have uncollected Accounts Receivable. A grocery store will not let you run a tab or give them an IOU for milk.

Fast Easy Accounting does the bookkeeping, accounting, and payroll and offers business coaching for small, brand-new Construction Contractors, General Contractors, Trade Contractors, and Handymen across the USA, including Alaska and Hawaii. Do the parts only you can do; leave the rest to us. 

You are never too small for us to help, and we can help to begin with your first day in business. We are looking forward to being of assistance. Schedule your free consultation here.

About The Author:

Sharie DeHart, QPA is the co-founder of Business Consulting And Accounting in Lynnwood, Washington. She is the leading expert in managing outsourced construction bookkeeping and accounting services companies and cash management accounting for small construction companies across the USA. She encourages Contractors and Construction Company Owners to stay current on their tax obligations and offers insights on managing the the remaining cash flow to operate and grow their construction company sales and profits so they can put more money in the bank. Call 1-800-361-1770 or sharie@fasteasyaccounting.com

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