Construction Accounting FAQs

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What is construction accounting software?

Construction accounting software is a computer program designed to make bookkeeping, payroll, billing and financial reporting easier for general contractors, subcontractors and others in the construction industry. It's different than general accounting software (like QuickBooks® or SAP) because it offers features specific to construction, including job costing, overhead allocation, certified payroll, prevailing wage reporting, AIA billing, over/under billing reports and more.

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What is job cost accounting?

Job cost accounting is a method of bookkeeping and accounting that assigns costs at the project level. It's often used in the construction industry, where revenue is based on billing clients for specific work performed and where expenses ("direct costs") are incurred for a specific job. The goal of job cost accounting is to get detailed and accurate reporting around job profitability and progress. Overhead or costs that can't be pinpointed to only one job ("indirect costs") are often allocated across some or all jobs.

What is job cost accounting software?

Job cost accounting software is an accounting system that focuses on job costing, profitability and progress by job. In the best job cost accounting software, all costs are coded or categorized so you can see a big picture of a job's profitability as well as line-item detail. In addition, it offers "overhead allocation" features that distribute overhead costs (like office electricity, administrative wages, computers, etc.) and other indirect costs (like gasoline used in equipment, phones used on the job site, etc.) across your jobs proportionately.

What is AIA billing software?

AIA billing software is a tool that allows you to produce and track receivable invoices easily in a specific format required by the American Institute of Architects ("AIA"). The IDs for these forms are G702 and G703, and they require the contractor to enter detailed information about the work completed on a job. The idea is that the architect or general contractor can review this detailed information and then "red line" (or adjust) the bill to reflect their estimation of what work has been completed. For that reason, AIAs often aren't paid in full like a standard invoice would be. AIA billing software keeps track of the differences and adjusts future bills accordingly.

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What is prevailing wage?

Prevailing wage often refers to the Davis-Bacon Act, which requires "contractors and subcontractors performing on federally funded or assisted contracts" to pay workers certain rates — including benefits — that match the "prevailing wage" in the job's geographic area. Many states and some municipalities have also passed "Little Davis-Bacon Acts," which apply to jobs funded by state or local funds. Federal, state and other agencies define what wages should be paid to each worker classification on a project. Contractors who bid and work on prevailing wage jobs are required to file "certified payroll reports" demonstrating their compliance with prevailing wage legislation.

What is certified payroll software?

Contractors who work on federally funded projects under the Davis-Bacon Act are required to pay "prevailing wage," a rate determined by the Department of Labor that mimics what other tradespeople in the area are paid. Part of these regulations also require those contractors to file a weekly report showing the wages that were paid and certifying their compliance with the law. These reports are often called "certified payroll" reports and are submitted on the Forms WH-347 and WH-348 or the equivalent. Certified payroll software produces these reports. The best construction accounting software includes certified payroll reports in addition to tools that make it simpler to bid on Davis-Bacon jobs, track payroll aligned with prevailing wage classifications, factor fringes into wage rates and help ensure compliance.

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What is overhead allocation?

Overhead allocation is a bookkeeping practice frequently used in construction accounting. Allocation distributes your business' overhead costs (costs necessary to support your operations but not directly billable — like electricity, office rent, administrative wages, etc.) across jobs so you can more accurately measure the profitability of each job. For a company that has a lot of overhead or very thin margins, accurately allocating overhead can be extremely important. Without that information, profitability might be artificially high, and project bids can be inaccurate.

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What's different about payroll for construction?

On the surface, construction payroll isn't much different than payroll for other industries. You track the employee's time, multiply it by an hourly rate, withhold taxes and process payments. However, payroll for construction gets more complicated in situations such as:

  • Employees receiving different rates depending on what they're doing (e.g., in the case of prevailing wage jobs)
  • Employees working in different localities or states, requiring different withholding rates
  • Employers required to produce specific payroll-related reports such as certified payroll, EEO minority compliance and union tracking
  • Employers wanting to capture job cost detail with labor hours

Because of these complexities, contractors often need to use construction-specific accounting software or outsource their payroll to the few services that specialize in construction payroll.

What is service dispatching software?

Service dispatch software is a set of tools used by contractors who frequently send employees to multiple sites to respond to service calls. It usually provides a way of tracking, scheduling and routing incoming service calls based on employee availability and job location. Some applications then communicate with the service tech so they know their schedule, receive updates and send data back to the office. Most service dispatch software includes a billing system or integrates with the accounts receivable module of accounting software. It should also integrate with payroll and provide job costing.

What is time and material software?

Time and material billing is a construction invoicing method in which billing is based on a markup rate of the labor and materials used on a job. Time and material software helps you track the necessary details by job and then create invoices that display the detail in an organized format. T&M applications are usually fully integrated with other accounting features and should allow you to record cash against the invoice, either as a whole or by marking specific line items as paid.

What is over/under billing?

Over/under billing, or WIP ("work-in-progress") is a reporting method that asks contractors to compare the amount billed to a job's progress. In theory, if you're 25% complete with a project, you might have billed 25% of the contract amount. Of course, that's not always the case. If you've billed 40%, you're considered "overbilled" and will have temporarily inflated profits. If you've billed 10%, you're "underbilling," and that can cause cash-flow issues. For contractors who work on large-scale, long-term projects, over/under billing reports are extremely important. WIP reports facilitate cash flow management and help reduce the risk of profit fading over the course of the project. It's also an essential health indicator often used by lenders and bonding agencies.