How to Setup Your Construction P&L: The Ultimate Guide

Are you a CFO or owner of a general contractor business looking to set up the P&L in an ERP or accounting system? This can be a difficult process, but it is important to get it right. In this blog post, we will walk you through the process step-by-step. We will discuss what goes into a P&L statement, and how to properly track your expenses and revenue. By following our guide, you will be able to create an accurate and complete P&L for your construction business!

There are a few key things that you will need to keep in mind when setting up your P&L. First, you need to track all of your income and expenses for each specific job. This includes billings from projects, as well as direct costs associated with materials, labor, overhead, and anything else directly related to a specific project. Additionally, you will need to estimate your gross profit margin for each job as we will discuss how important it is for Revenue Recognition.

Job Cost

The most important tool in construction accounting is the job cost report and sometimes referred to as the work-in-progress schedule. In order to generate a job cost report, your company will need to track actual costs incurred for each job as well as estimated costs.

Revenue Recognition

Once you have your job cost report set up and are able to track actual costs incurred against estimated costs, you can begin recognizing revenue. Revenue is recognized as a percent of your actual costs incurred relative to your estimates. This method is referred to as the percentage of completion method and is the most common method used in construction accounting. The main advantage of this method is that it matches revenue with the actual costs incurred to date, which gives you a better idea of your project’s profitability. These are covered in a previous blog, the accounting standard specific is covered here.

For example, if you are job is 90% complete and you have incurred $100,000 in actual costs, you would recognize $90,000 in revenue. Additionally, when the project's billings exceed the revenues earned this is called an overbill, likewise when billings are less than the revenue earned, this is called an underbill.

Indirect Cost of Sales

After your revenues and direct costs, the next line on your P&L will be your indirect cost of sales. This line will include your indirect labor, which is any employee who is not directly working on the project, such as estimators, warehouse staff, and project managers. Additionally, this line will include your indirect materials, which are any materials that are consumed in the office or on the job site that are not directly attributable to a specific job. Finally, this line will also include your fleet of vehicles and any other indirect costs associated with your business.

Gross Profit

After your cost of sales, the next line on your P&L will be your gross profit. This is simply your revenue less your cost of sales and is often referred to as your "job margin." This number will give you an idea of how much profit you are making per job.

Sales and Marketing

Next up are the costs to acquire customers. These are typically your marketing and sales expenses. For example, if you spend money on Google AdWords or hire a salesperson, those costs would fall into this category.

General and Admin

The next section of your P&L is your general and administrative expenses. This line includes all the day-to-day costs associated with running your business that are not directly utilized to serving or acquiring customers. These include overhead costs like rent, utilities, legal, accounting, information systems, management salaries, and insurance.

Profit

The last section of your P&L is your net income or profit. This is calculated by subtracting all your expenses from your total revenue.

To Recap

- Revenues

- Direct Cost of Sales

- Indirect Cost of Sales

- Gross Margins

- Sales and Marketing

- General & Admin

- Profit

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Once you have all this information, you can begin setting up your P&L. The easiest way to do this is to use an accounting program such as QuickBooks, Xero, Sage or NetSuite. These programs will allow you to track your revenue and expenses, as well as provide templates for creating your P&L report.

If you are a construction company and need help choosing and implementing the right ERP, contact us today!