5 Accounting Questions Contractors Should Ask When Starting a New Construction Company

When you’re thinking about starting a construction company, it’s vital to have a smart financial strategy in place, rooted in accounting basics. The decisions you have to make early in the process can cause serious impacts on your company’s financial and ongoing success. Though accounting probably wasn’t why you started your construction company, having the right plan in place for your financial strategy can help reduce your administrative duties, keeping them from overshadowing your customer relationships or ability to work in the field. When you ask these questions early in company setup, you can leverage accounting basics to reduce cost, increase profitability and minimize tax liabilities.

#1: Will my choice of entity type support personal and business goals while helping me to save on taxes?

There are several reasons why to pick a specific type of entity, with each entity having its own costs and benefits. Contractors must determine what’s right on a case-by-case basis in order to stay in compliance with applicable laws and meet the owners’ personal and business goals for financial responsibility, legal liability and transferability of funds in the most tax-efficient way.

When you understand how each type of entity is taxed, it will help you to then develop a solid financial and tax strategy for your business. However, in some situations, you can choose to be taxed in different ways between state and federal levels. Some LLCs may make an S election using IRS Form 2553 or make a Corporation, Partnership or Disregarded Entity election on IRS Form 8832.

#2: Are my job costing practices aligned with effective cost management?

Though you’ll get more happiness in watching sales and revenue figures, it’s just as important to keep an eye on financial and operating costs. You need to make sure that your fees will stay in line with competitors while jobs need to create enough revenue to exceed expenses. This includes overhead, labor and materials for each project. Your job costing practices need to allow you to break down all the expenses per project. Accurate data allows you to make more accurate estimates, lower risk and analyze each job’s profitability.

By tracking these costs at a very small level, you can quickly make needed pricing changes overall while adjusting costs on the fly before your projects start to show a loss. Your job costing process needs to account for things such as unexpected supply price increases, additional labor and equipment costs as well as similar expenses while capturing delay and scheduling costs against potential future claims.

#3: Can I maximize cash flow and financial standing while accurately assessing and projecting capital and liquidity needs?

Construction is an industry that can quickly see shifts in cash flow and liquidity, partially because many costs are paid in advance while billing and payments can be uncertain in when they’re received. Regular accounting review allows you to take corrective or preventative actions when needed. Prepare financial statements, cash flow forecasts and similar projections, then regularly measure them against actual cash flow

You’ll also want to make sure that you’re on top of financial options and surety bonding relationships by keeping your accounting practices transparent. When you need to communicate with these organizations, be proactive. If you suddenly have a new opportunity arise that requires funding, the relationships provide leverage. Try to approach every financial obligation seeking terms flexibility.

#4: Does my strategy account for risk management?

Risk management is vital to your business strategy. Take the time to step back from competitive bidding on occasion to evaluate your risks. Don’t put out a lot of low estimates out of fear, but rate your projects using a system that includes work type, predetermined minimum profitability, bonding needs, overall timeframe and if your workers have the right skillset. Prioritize time and expense estimates with jobs that provide the best profit.

Subcontractors can also increase your risk, because your contracting firm has limited control. You’ll need to properly vet your subcontractors while minimizing both their and your risk exposure.

#5: Does my strategy leave options to leverage new technology?

Digital transformation is impacting virtually every industry, including construction, and the expense can be significant. However, it can provide a solid return on your investment. Advances provide new opportunities for vertical integration, such as operations structured for in-house distribution or using prefabricated, modular construction processes to reduce costs, improve efficiency and improve profitability.

Cost-benefit analysis provides projected savings in time, efficiency, costs and risks while improving profitability by automating manual software processes. As an example, estimating software that allows real-time costing, asset management, risk assessment and customer relationship management improves your overall profitability.

Before starting your own business, ask yourself these five accounting questions to make sure you’re starting off on the right foot. If you would like additional guidance, our team of business professionals can provide you with industry-specific advice for construction startups and established businesses. We’ll help you find the right solutions.

If you have any questions or want to discuss starting your own construction company, please contact a member of Our Team or call us at 617-738-5200.