Best Practices for Organizing Your Construction Chart of Accounts

As a contractor or business owner in the construction field, you already know how hard it is to keep track of money. With complicated tasks, changing costs, and the need to keep accurate records of spending, it is very important to have a well-organized chart of accounts (COA). We'll talk about best practices, give examples, and give you useful tips to make your construction accounting process easier in this blog.

Understanding the Basics of a Chart of Accounts 

What is a Chart of Accounts?

Your accounting system is built around a chart of accounts. The list is organized into groups of all the financial accounts in your business, such as assets, liabilities, equity, income, and expenses. In construction, this list often includes specific categories like job costs, subcontractor payments, and equipment expenses.

Why is it Important for Construction?

There are often a lot of moving parts in construction tasks. With a customized COA, you can:

• Keep good track of job costs.

• Find the places where costs are high.

• Make sure your tax returns are correct.

• Make your finances more clear generally.

Important Parts of a Construction Chart of Accounts

• Assets: Cash, accounts receivable, and equipment.

• Liabilities: Loans, credit lines, and accounts payable.

• Equity: Owner’s investments and retained earnings.

• Income: Revenue from projects.

• Expenses: Labor, materials, subcontractors, and overhead.

Read more: How To Build The Chart of Accounts For A Construction Company

Construction Chart of Accounts Best Practices

It takes planning and hard work to make and keep up a strong chart of accounts for your building business. Here are some tips to make sure your COA works well as a tool for managing your money:

1. Align Your COA with Business Goals

Your short-term and long-term business goals should be reflected in your chart of accounts. For instance, if you want to cut down on overhead costs, set up thorough subaccounts to keep an eye on things like insurance, utilities, and administrative costs.

2. Standardize Account Numbers and Names

Use the same method for numbers and give each account a name that tells you what it is. This makes sure that everyone on your team knows the accounts and cuts down on data entry mistakes.

3. Incorporate Project-Specific Accounts

For each job, make a separate account or sub-account. This lets you keep accurate records of each job's income and costs, which makes it easier to figure out how profitable the business is and keep costs down.

4. Maintain Separate Accounts for Labor and Materials

Labor and materials are two of the largest cost drivers in construction. By keeping them separate, you can analyze and manage these expenses more effectively.

Read more: 4 Proven Strategies to Control Your Construction Material Costs

5. Include Retainage Accounts

In construction, retainage, which is the part of the payment that is held back until the job is finished, is widespread. To keep track of these amounts correctly, make different accounts for retainage payable and retainage receivable.

6. Ensure Tax Compliance

Your COA should be set up in a way that makes it easy to file your taxes correctly. Include records of sales tax paid, income taxes, and any other taxes that are owed.

7. Implement Regular Training for Your Team

Educate your staff about the structure and purpose of your COA. This ensures accurate data entry and consistent use of accounts.

8. Leverage Technology for Automation

Many COA-related jobs can be done automatically by modern accounting software, such as sorting transactions into categories and making reports. Pick a platform that works well with the way you run your business.

9. Monitor Key Performance Indicators (KPIs)

Keep an eye on key performance indicators (KPIs) like project profitability, sales profit margin, and overhead percentage with your COA. These measures tell you a lot about the state of your finances.

10. Periodically Audit Your COA

Do regular checks to find old or unused accounts and get rid of them. A simplified COA makes things easier to understand and more accurate.

Tips for Organizing Your Construction COA

Tailor Categories to Your Business: Don't use standard forms. Change your COA to fit the needs of your projects and business.

Separate Direct and Indirect Costs:  Direct costs are things like goods and labor that are needed for a specific project. Indirect costs are things like office rent that are needed for all projects.

Use Subaccounts and break up the big groups: for things like lumber, concrete, and appliances under "Materials Expense."

Integrate with Job Costing: Ensure your COA aligns with your job costing system to track project-specific profitability.

Focus on Financial Reporting: Design your COA to make generating reports, such as profit and loss statements, straightforward.

How to Work on Your Chart of Accounts 

Getting started with your COA doesn’t have to be daunting. Begin by:

• Listing all your income and expense categories.

• Grouping accounts logically (e.g., all job costs together).

• Using software to automate the process.

Our team at Construction Cost Accounting can help if you're short on time or not sure if what you're doing is right. We are experts at setting up and keeping up with COAs that are specific to building companies. Hiring someone else to do your paperwork will save you time, cut down on mistakes, and give you peace of mind that your money is in good hands.

A well-structured construction chart of accounts isn’t just a bookkeeping tool—it’s a roadmap to better financial management. By following these tips and leveraging professional help when needed, you can focus more on building projects and less on crunching numbers.