Construction and trades businesses face accounting challenges that many other businesses do not.

A contractor can have a profitable year on paper while struggling for cash because customers have not paid yet. One project can appear profitable until labour, subcontractor and equipment costs are properly allocated. Progress billings and holdbacks can also make the amount invoiced very different from the amount actually collected.

For contractors and trades businesses in Edmonton and throughout Alberta, good accounting should provide more than a total revenue and expense number at the end of the year.

Ideally, it should help answer a much more important question:

Which jobs are actually making money?

1. Track Income and Costs by Job

One of the most useful accounting tools for a construction or trades business is job costing.

Instead of looking only at the company’s total expenses, job costing assigns revenue and costs to individual projects.

Depending on the business, costs may include:

• Materials
• Direct labour
• Subcontractors
• Equipment rentals
• Disposal fees
• Permits
• Freight and delivery
• Travel
• Other project-specific expenses

For example, a contractor may invoice $100,000 for a project and initially think the job was highly profitable.

But that number means very little without knowing how much labour, material, subcontractor and equipment cost was required to earn the $100,000.

Tracking each project separately helps management compare estimated costs with actual results.

2. Know Your Gross Profit by Project

Revenue is important, but revenue alone does not tell you whether a project was successful.

Imagine two jobs:

Job A

Revenue: $150,000
Direct project costs: $100,000
Gross profit: $50,000

Job B

Revenue: $200,000
Direct project costs: $180,000
Gross profit: $20,000

Job B generated more revenue, but Job A generated significantly more gross profit.

Without proper job costing, an owner could easily conclude that the larger project was the better project.

Tracking gross profit by job can help contractors identify:

• Which types of work are most profitable
• Whether estimates are accurate
• Where projects are going over budget
• Whether labour costs are being recovered
• Whether pricing needs to change
• Which customers or project types may not be worth pursuing

This turns accounting into a management tool rather than simply a tax requirement.

3. Compare Estimated Costs to Actual Costs

Many contractors prepare detailed estimates before starting a project but do not compare the estimate with the final accounting records once the work is complete.

That is a missed opportunity.

After completing a significant project, compare:

Estimated revenue vs. actual revenue

Estimated materials vs. actual materials

Estimated labour hours vs. actual labour hours

Estimated subcontractor costs vs. actual subcontractor costs

Estimated gross profit vs. actual gross profit

If the same category consistently exceeds the estimate, the problem may be in the estimating process rather than the accounting records.

For example, if actual labour is consistently 15% higher than estimated labour, future quotes may need to account for that difference.

4. Understand Progress Billings

Many construction contracts are not invoiced only once when the project is completed.

Instead, customers may be billed through a series of progress invoices as the work is performed.

This can create a difference between:

• Work completed
• Amounts invoiced
• Cash received

Those three numbers should not automatically be treated as the same thing.

A company may complete significant work in December but not receive payment until January or February.

Conversely, a company may sometimes receive amounts before all of the related work is completed.

Accurate accounting helps identify these timing differences and ensures the financial statements properly reflect the economic activity of the business.

5. Keep Holdbacks Separate

Holdbacks are particularly important in construction accounting.

A customer may withhold part of an amount otherwise payable until certain contractual or statutory conditions have been satisfied.

From an accounting perspective, contractors should be able to identify:

• Total amount invoiced
• Amount currently collectible
• Amount being held back
• Date the holdback becomes collectible
• Amount eventually received

Do not simply treat the difference between an invoice and the customer’s payment as an unexplained outstanding receivable.

Holdbacks should be tracked separately so management knows what is actually overdue and what is not yet collectible.

There are also specific GST/HST timing rules for qualifying construction holdbacks. CRA states that where a construction holdback is retained in accordance with applicable law or a written agreement, GST/HST on the holdback generally becomes payable on the earlier of the date the holdback is paid and the date the holdback period expires.

That makes it important for the accounting records to distinguish ordinary accounts receivable from holdback receivables.

6. Track GST Correctly on Progress Payments

GST can become complicated when a business uses progress billings, deposits and holdbacks.

For construction services, CRA has specific rules governing when GST/HST becomes payable on progress payments.

The timing of the invoice, payment, contractual obligation and holdback can all matter.

Construction businesses should therefore avoid calculating GST solely by looking at deposits in the bank account.

Your GST records should reconcile to your accounting records and supporting invoices.

This is particularly important for contractors with a large number of projects running at the same time.

7. Watch Accounts Receivable Closely

Construction companies can show a profit and still run into serious cash-flow problems if customers take too long to pay.

A regular accounts receivable report can help owners identify:

• Current invoices
• 30-day balances
• 60-day balances
• 90-day balances
• Amounts older than 90 days
• Holdback receivables
• Disputed amounts

Old receivables should not simply remain on the books indefinitely.

Management should regularly determine whether outstanding balances are collectible and follow up on overdue invoices.

The longer an invoice remains unpaid, the more pressure it places on working capital.

8. Don’t Confuse Profit With Cash Flow

Construction businesses often have significant timing differences between paying expenses and receiving customer payments.

You may have to pay for:

• Materials
• Payroll
• Subcontractors
• Fuel
• Equipment
• Insurance

before receiving payment from the customer.

As a result, a profitable project can still create a temporary cash shortage.

This is why construction businesses should monitor both profitability and cash flow.

A company may be earning money overall but still need sufficient working capital to finance projects while waiting for progress payments and holdbacks to be collected.

9. Record Equipment Properly

Trucks, trailers, skid steers, excavators, tools and other equipment can represent a significant investment for Alberta trades and construction companies.

Larger equipment purchases may need to be recorded as capital assets rather than immediately expensed.

Your accounting records should maintain information such as:

• Description of the asset
• Purchase date
• Original cost
• Financing
• Trade-ins
• Disposals
• Business use

Keeping proper asset records makes year-end accounting and tax preparation much easier.

It can also help management understand how much capital is tied up in equipment.

10. Separate Loan Payments From Expenses

Another common accounting issue occurs when equipment or vehicles are financed.

A monthly loan payment is not necessarily entirely an expense.

Part of the payment may reduce the outstanding loan balance, while another portion may represent interest.

If the entire payment is recorded as an expense, both the income statement and balance sheet can become inaccurate.

The loan should be reconciled to lender statements and year-end balances.

11. Monitor Subcontractor Costs

For businesses that rely heavily on subcontractors, subcontractor costs should be tracked by project whenever possible.

This helps management determine whether:

• A project remained within budget
• Subcontractor pricing has increased
• Certain types of work should be performed internally
• Quotes need to be adjusted
• Particular projects consistently have lower margins

It also helps ensure contractor invoices and payments are properly documented at year-end.

12. Review Jobs Before Year-End

Year-end accounting for a construction business should include more than reconciling the bank account.

For significant jobs in progress, management and the accountant may need to understand:

• Contract value
• Work completed
• Amount billed
• Amount collected
• Remaining work
• Estimated costs to complete
• Holdbacks
• Change orders
• Project profitability

Keeping this information organized throughout the year makes year-end reporting significantly easier.

Better Accounting Can Lead to Better Bidding

Accounting should help contractors answer practical business questions.

Are we charging enough?

Which type of project produces the best margin?

Are labour estimates realistic?

Are material costs increasing faster than our pricing?

Which customers take too long to pay?

Are change orders being billed?

Are our projects actually profitable?

When accounting records are organized by project rather than simply accumulated for tax season, they can provide answers to these questions.

Accounting Services for Alberta Contractors and Trades Businesses

Construction and trades businesses have unique accounting requirements, particularly when managing multiple jobs, equipment, subcontractors, progress billings, receivables and GST.

Seniuk & Marcato, Chartered Professional Accountants works with businesses in Edmonton and throughout Alberta and provides accounting, bookkeeping, corporate tax and financial statement services.

If you operate a construction, contracting or trades business and want better information about project profitability, year-end reporting or your company’s overall financial position, contact Seniuk & Marcato to discuss your accounting needs.

This article provides general information only and is not intended to provide accounting, tax or legal advice for a specific contract or transaction.