Introduction
Starting a construction project requires meticulous financial planning and accounting setup from day one. Whether you're a general contractor launching your first major project or an established firm beginning a new job, having a comprehensive accounting checklist ensures proper financial tracking, compliance, and profitability analysis throughout the project lifecycle.
This guide provides a detailed accounting checklist specifically designed for construction job startups, covering everything from initial project setup to ongoing financial management systems.
Pre-Project Financial Setup
Project Code and Structure Creation
Before breaking ground, establish a unique project identification system:
- Create unique project codes for easy tracking across all financial systems
- Set up job cost centers for different phases or areas of work
- Establish work breakdown structure (WBS) codes aligned with your estimating system
- Configure accounting software with project-specific parameters
Contract and Legal Documentation Review
Contract Analysis Checklist:
- Review payment terms and milestone schedules
- Identify retention requirements and percentages
- Note change order procedures and approval processes
- Document warranty and guarantee obligations
- Understand lien waiver requirements by jurisdiction
Insurance and Bonding Verification:
- Confirm general liability coverage is adequate
- Verify workers' compensation requirements
- Review performance and payment bond requirements
- Document additional insured requirements
Chart of Accounts Setup for Construction Projects
Revenue Account Configuration
Primary Revenue Categories:
- Contract revenue - original contract amount
- Change order revenue - approved modifications
- Extra work revenue - time and material work
- Retention receivable - amounts held by owner
Cost Account Structure
Direct Job Costs:
- Materials and supplies
- Direct labor costs
- Subcontractor expenses
- Equipment rental and operation
- Job-specific permits and fees
Indirect Costs:
- Project management salaries
- Job site utilities and facilities
- Small tools and consumables
- Job site insurance premiums
Work-in-Progress (WIP) Accounts
Establish proper WIP accounting structure:
- Costs incurred to date
- Estimated costs to complete
- Contract revenue recognized
- Billings to date
- Over/under billings calculation
Job Cost Tracking System Implementation
Cost Code Development
Create a standardized cost coding system:
Major Cost Categories (typically include):
- Site preparation and excavation
- Concrete and masonry work
- Structural steel and framing
- Mechanical, electrical, and plumbing (MEP)
- Finishes and specialties
Time Tracking and Payroll Setup
Labor Cost Tracking Requirements:
- Implement daily time reporting by cost code
- Set up certified payroll requirements for public projects
- Configure prevailing wage calculations where applicable
- Establish overtime and shift differential tracking
Material and Equipment Cost Tracking
Procurement Tracking System:
- Purchase order system linked to job costs
- Material receiving and inventory management
- Equipment rental tracking and allocation
- Vendor payment processing and 1099 requirements
Cash Flow Management Setup
Project Cash Flow Forecasting
Develop comprehensive cash flow projections:
Revenue Forecasting:
- Monthly billing schedule based on completion percentages
- Retention release timing
- Change order approval and billing timeline
Cost Projections:
- Material delivery and payment schedules
- Subcontractor payment terms
- Equipment rental commitments
- Labor cost escalation factors
Banking and Credit Line Setup
Financial Infrastructure:
- Establish project-specific banking arrangements if required
- Secure adequate credit lines for working capital needs
- Set up electronic payment systems for efficiency
- Configure lockbox services for customer payments where beneficial
Compliance and Reporting Framework
Tax Compliance Setup
Multi-State Considerations:
- Register for sales tax in project locations
- Understand nexus requirements for income tax
- Set up local business license and permit tracking
- Configure use tax accrual systems
Prevailing Wage Compliance (Public Projects)
Documentation Requirements:
- Certified payroll reporting systems
- Fringe benefit tracking and reporting
- Apprenticeship program compliance
- Subcontractor compliance monitoring
Lien Rights and Notice Requirements
Legal Compliance Tracking:
- Preliminary notice filing requirements
- Progress payment application procedures
- Lien waiver exchange processes
- Final payment and release documentation
Technology and Software Integration
Construction-Specific Accounting Software
Key features to ensure are properly configured:
Essential Functionality:
- Job costing capabilities with real-time reporting
- Progress billing and AIA form generation
- Retention tracking and release management
- Change order management and approval workflows
- Integration with project management systems
Mobile and Field Integration
Field Data Collection:
- Mobile time tracking applications
- Digital daily reporting systems
- Photo documentation with cost code linking
- Material receipt and inspection apps
Performance Measurement and KPI Setup
Financial Performance Metrics
Key Performance Indicators to Track:
- Gross profit margin by job and phase
- Cost performance index (actual vs. budgeted costs)
- Schedule performance index (earned value analysis)
- Cash conversion cycle timing
- Working capital requirements
Regular Reporting Schedule
Monthly Reporting Package:
- Job cost reports with variance analysis
- Work-in-progress schedules
- Cash flow projections and updates
- Billing status and collection reports
- Change order logs and profitability analysis
Risk Management and Internal Controls
Financial Risk Assessment
Common Risk Areas:
- Cost overrun exposure and mitigation strategies
- Weather and delay impact on cash flow
- Subcontractor default and bonding requirements
- Material price escalation clauses
Internal Control Implementation
Segregation of Duties:
- Purchase order approval hierarchies
- Payment authorization limits
- Job cost review and approval processes
- Bank reconciliation and cash management controls
Subcontractor Management Systems
Subcontractor Onboarding
Required Documentation:
- Certificate of insurance verification
- W-9 forms and tax ID verification
- License and certification validation
- Lien waiver templates and procedures
Payment Processing Setup
Subcontractor Payment Management:
- Three-way matching procedures (PO, receipt, invoice)
- Retention calculation and tracking systems
- Joint check procedures where required
- 1099 reporting and year-end processing
Month-End and Period-End Procedures
Job Cost Allocation and Review
Monthly Closing Checklist:
- Review and approve all job cost entries
- Allocate indirect costs to appropriate projects
- Update percentage of completion calculations
- Reconcile work-in-progress accounts
- Review and approve progress billing
Financial Statement Preparation
Construction-Specific Considerations:
- Over/under billing calculations and presentation
- Revenue recognition under percentage of completion method
- Contract asset and liability classification
- Disclosure requirements for significant contracts
Documentation and Record Keeping
Essential Documentation Systems
Critical Records to Maintain:
- Original contracts and all modifications
- Daily reports and progress documentation
- Material delivery receipts and inspection reports
- Certified payroll records (public projects)
- Insurance certificates and bond documentation
Document Retention Policies
Establish appropriate retention schedules based on:
- Statute of limitations requirements
- Warranty and guarantee periods
- Tax audit statute of limitations
- Industry best practices for construction records
Frequently Asked Questions
What accounting method should construction companies use?
Most construction companies benefit from using the percentage of completion method for long-term contracts, as it provides better matching of revenues and expenses. However, the specific method depends on contract duration, company size, and tax considerations. Consult with a construction accounting specialist to determine the best approach for your situation.
How often should job costs be updated and reviewed?
Job costs should typically be updated weekly at minimum, with formal reviews conducted monthly. For large or complex projects, daily cost tracking may be necessary. The key is maintaining current information for effective project management and early identification of cost overruns.
What are the most critical financial controls for construction projects?
The most critical controls include: three-way matching for all purchases, segregated approval authorities for different expense levels, regular job cost variance analysis, proper documentation of change orders, and systematic lien waiver management. These controls help prevent fraud and ensure accurate project profitability.
How should retention be handled in construction accounting?
Retention should be tracked separately as a receivable, typically classified as a contract asset. Establish clear procedures for retention release requests, ensure proper documentation is maintained, and monitor aging to ensure timely collection. Consider the impact of retention on cash flow projections.
What technology integrations are most beneficial for construction accounting?
The most beneficial integrations typically include: project management software for real-time cost tracking, mobile applications for field data collection, estimating software for budget comparisons, and banking platforms for automated payment processing. Choose integrations that eliminate duplicate data entry and provide real-time visibility.
Conclusion
Implementing a comprehensive accounting system for construction job startups requires careful planning and attention to industry-specific requirements. This checklist provides the foundation for establishing proper financial controls, tracking systems, and reporting procedures that will support successful project completion and profitability.
Remember that construction accounting involves unique challenges including long-term contract accounting, complex cost allocation, and extensive compliance requirements. Consider working with accounting professionals who specialize in construction industry practices to ensure your systems are properly configured and compliant with current regulations.
Regular review and updates of your accounting procedures will help maintain accuracy and efficiency as your projects progress and your business grows. The investment in proper accounting setup at the beginning of each project typically pays dividends through improved cost control, better cash flow management, and more accurate profitability analysis.