Construction businesses generally have money moving in and out at different stages of a project. Materials and subcontractors need payment before a client makes the next progress payment.
Basic bookkeeping records these transactions, but construction businesses also need to know which job the payment belongs to, invoices, outstanding amounts and profitability of the project. This is where specialised bookkeeping services help keep project costs, progress payments and retentions organised.
When these figures are managed by project, business owners get a clearer picture of the money in each job and the cash they can expect to receive.
How Job Costing Helps Track the True Cost of a Project
A construction project seems profitable based on its quoted price, but the actual margin depends on what you spend to complete the job. Job costing helps you track these costs against each project instead of treating all business expenses as a single unit.
For each job, you can record direct costs like:
- Materials: Timber, concrete, steel, fittings and other supplies.
- Labour: Wages and other labour costs directly linked to the project.
- Subcontractors: Payments to electricians, plumbers, carpenters and other trades.
- Plant and equipment: Project-based equipment hire and related costs.
- Other job costs: Delivery, waste removal and other expenses for the project.
Comparing these actual costs with the original quote or budget shows whether a project is tracking as expected. If material costs rise or labour hours exceed the initial estimate, you can identify the difference while the project is still underway rather than discovering it after completion.
This also makes it easier to understand the actual profit margin of each project. It also differentiates between jobs that are generating healthy returns and those where costs are exceeding the margin.
Managing Progress Payments and Progress Claims
Construction projects usually run for weeks or months, so waiting until the entire job is finished to receive payment puts pressure on your cash flow. Progress payments allow you to invoice the client at agreed stages of the project, based on work completed or milestones reached.
From a bookkeeping perspective, each progress claim must be recorded against the correct project and matched with the payment when it is received. This gives you a clear record of what has already been billed, what has been paid and what remains outstanding.
Keeping progress payments organised also helps you identify overdue amounts before they become a larger cash flow problem. When your books clearly show upcoming and outstanding claims, you can better anticipate when money should come into the business and plan your expenses around those expected payments.
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How Retentions Affect Construction Bookkeeping
A retention is an amount a client holds from a construction payment until an agreed stage of the project is reached. It gives the client some protection if defects or outstanding work need to be addressed, but it also means your business may have completed the work without receiving the full amount invoiced.
For bookkeeping purposes, it is important to differentiate between the amount invoiced, the amount received and the retention still owed.
For example, if you invoice $50,000 and the client retains 5%, you receive $47,500 while the remaining $2,500 stays outstanding until the retention is released.
Keeping these amounts clearly recorded helps you avoid treating the retained money as a normal overdue invoice or overlooking it altogether. You can also track when each retention is due for release and include those expected receipts when reviewing the project’s cash flow.
GST on Construction Materials and Labour
For construction businesses registered for GST, keeping GST records accurate is important because both project income and many business purchases can involve GST. GST-registered businesses generally charge GST on taxable sales and may claim GST credits for eligible business purchases.
Materials such as building supplies may include GST when purchased from a GST-registered supplier. If the purchase meets the requirements for a GST credit, the business can claim the GST paid in its activity statement. Labour must also be recorded correctly when subcontractors complete work.
The GST treatment depends on the subcontractor’s circumstances and the nature of the supply, so invoices and supplier records should be checked rather than assuming every payment is treated the same way.
Keeping material, labour and subcontractor costs properly recorded also makes it easier to reconcile GST and prepare accurate BAS records. Construction businesses should also be aware that payments to contractors may have separate reporting obligations under the Taxable Payments Annual Report (TPAR).
Managing Construction Cash Flow When Payments Are Delayed
Construction businesses have to cover wages, supplier invoices, subcontractor payments and other project costs before receiving the next progress payment from a client. Retentions can extend this gap further, leaving money tied up in completed work. Without a clear view of what is due and when it is expected, a business can have a healthy project pipeline but still struggle to meet short-term expenses.
Northern Beaches bookkeeping services for construction companies can help you keep progress payments organised by recording invoices against the correct projects, tracking outstanding amounts and managing payments as they come in. Contact us to know more about how you can setup your business payments through bookkeeping.
