Construction Accounting: How Subcontractors Can Improve Cash Flow

Select the best construction billing method

• Utilize strategic billing

• Spell out payment schedule in contract

Whether your company installs heating and air, wiring, or piping, retain a firm grasp on financial statements throughout a new construction project to maintain a healthy cash flow.

Subcontractors can find themselves in a tough spot, relying on timely payments from the general contractor after performing work. The Credit Research Foundation’s quarterly Accounts Receivable and Days Sales Outstanding Industry Report shows nearly 30 percent of general contractors receive payments 60 to 90 days late, which in turn could affect subcontractors.

Progress billing, or billing upon completion of phases or milestones, is one of the most effective methods for construction companies.

Hometelligent President Silvio Dobrovat suggests structuring billing payments into smaller milestones to maintain a constant influx of money.

Breaking up a large phase needs to be proportional to the size of the contractor and project, but it works especially well for multiple, larger-scale projects in the $200,000 range, he says. For example, in a new house build, you could break up the foundation phase into three milestone payments for forms, rebar, and pouring.

“If you’re running multiple projects and they all have micro-milestones, then you’re constantly getting paid,” Dobrovat says.

Follow a profit-generating model

• Submit accurate estimates

• Understand proper accounting for construction

Make sure your company chooses profitable projects and submits accurate estimates, with pricing that adequately covers costs and ensures profits. To prevent underbidding or underbilling, clearly outline the scope of a project so the builder knows up front what your costs include.

If your pricing falls short and you end up doing more work, that compounds the problem, says ServiceTitan’s Director of Customer Relations, Chris Hunter, who is also Founder of Hunter Super Techs and Go Time Success Group.

Ensuring your company operates correctly requires your commitment to understanding numbers and financials, which includes knowing proper accounting for contractors. 

For construction businesses, revenue recognition from construction projects remains a key principle of Generally Accepted Accounting Principles (GAAP). While construction accounting methods vary based on the type of project and financial governance, methods for reporting expenses to the IRS include:

• Cash method

• Accrual method

• Percentage of completion method (PCM) for long-term contracts

• Completed contract method for long-term contracts

ServiceTitan’s Construction & Service Software integrates with QuickBooks or Sage Intacct accounting software for accurate, seamless reporting to eliminate manual accounting errors.

Track cash flow projections

• Frequently forecast and budget

• Gain leverage for future jobs

Subcontractors who forecast and constantly budget often come out ahead.

Alan Lefkowitz, founder of New Jersey-based CFO Strategies, recommends construction management companies move toward a routine of monthly forecasting, year-round. Subcontractors also benefit from this practice.

"Financial periods are really arbitrary,” Lefkowitz says. “We do annual reporting, and we do quarterly reporting, but business is continuous. Budgeting should be a continuous evaluation, constantly being updated.”

This allows HVAC, electrical, plumbing, and landscaping subcontractors to figure the total amount of direct and indirect costs—like labor, materials, equipment costs, overhead, and profit margin—to complete current jobs.

"What we're talking about is the ability to look forward, anticipate, and project,” Lefkowitz says. “And that allows management to adjust for changing circumstances, which happen in construction every day.”

An added benefit of accurate forecasting and budgeting: examining past project financials enables you to more accurately predict the costs of future jobs.

Manage project details

• Stay proactive by tracking changes

• Keep documents in one place

From the rough-in estimate to the final punch list, new construction projects involve numerous details.

While your project manager keeps a finger on the pulse of the construction job, use ServiceTitan cloud-based software as an all-in-one solution to keep your project's documents and details in one place. Easily obtain information relating to the construction contract and contract price, including Requests for Information (RFIs), change orders, and construction back charge forms to maintain efficient project management.

Stay proactive and accurately track change orders by documenting extra labor costs at the job site, estimated costs, and any related scheduling changes.

The construction contract remains vital to your billing protocol, as well as other terms that financially affect your company. 

Experts suggest using your own terms to construct a bid proposal, instead of using the general contractor's standard template, because payment terms may favor the builder instead of your company. Make sure retainage (withholding a portion of funds due to the contractor upon project completion) is based on the percent complete, and the amount of retention does not shortchange your company.

Implement job costing software

• Track real-time data for each job

• Make data-driven decisions

Job costing provides the information you need to make better decisions related to your subcontracting work.

ServiceTitan's Job Costing Software gives you a quick breakdown of job costs based on material, purchase orders, equipment, labor burden, and payroll costs, so you can increase productivity and see your profit on every job. 

You can accurately measure budgeted versus actual costs using real-time data, and avoid manual-entry errors. At-a-glance features show contract amount and percentage of contract revenue obtained, as well as percentage of completion, which improves cash flow management.

The software is indispensable when it comes to instantaneous data collection.

"We can see where we're coming out on the job, rather than a month later," says Tyler Edelman, CFO of Edelman Inc., an electrical, HVAC and plumbing company based in Champaign, Illinois. Without it, the company would need to examine QuickBooks later, after all the financials become categorized and departmentalized, he adds.

Automate construction billing

• Create a seamless billing process

• Bill in phases for the same job

Maintaining a proper billing schedule directly affects cash flow: no invoice, no money.

While it’s challenging to manually monitor multiple billing phases for several projects simultaneously, ServiceTitan's Payment Software ensures a seamless billing process by automating complicated tasks. 

Set a billing schedule for separate phases of the same job to prevent manual invoicing mistakes. Construction billing software enables you to effortlessly monitor your accounts receivable and accounts payable, eliminating manual reconciliation; the software automatically matches your electronic payments to your bank deposits, so you can create an easy-to-export batch report for your accounting software.

Save time and money by streamlining your business processes, and increase your company's bottom line in the end.