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!
Setting up your P&L involves several key considerations. First and foremost, you must meticulously track both income and expenses for each specific job or project. This entails recording billings from projects and accounting for direct costs related to materials, labor, overhead, and any other expenses directly associated with a particular project. Additionally, estimating your gross profit margin for each job is essential, especially for Revenue Recognition purposes.
Job Cost
Central to construction accounting is the job cost report, often referred to as the work-in-progress schedule. To generate this report, your company needs to track both actual costs incurred and estimated costs for each job.
Revenue Recognition
Once you have a job cost report in place, you can initiate the process of recognizing revenue. Revenue is recognized as a percentage of actual costs incurred relative to your estimates, following the percentage of completion method commonly used in construction accounting. This method aligns revenue with actual costs incurred, providing a clearer picture of project profitability.
For instance, if a project is 90% complete and has incurred $100,000 in actual costs, you would recognize $90,000 in revenue. Furthermore, when billings for the project exceed the revenue earned, it's termed an overbill, while the opposite scenario is an underbill.
Indirect Cost of Sales
The subsequent line on your P&L pertains to indirect cost of sales. This category encompasses indirect labor, such as employees not directly involved in project work (e.g., estimators, project managers), indirect materials not tied to specific projects, and costs related to your business's fleet and other indirect expenses.
Gross Profit
Following cost of sales, your P&L displays the gross profit, often referred to as the "job margin." This figure reveals the profit earned 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 will fall into this category.
General and Admin
The next section of your P&L is your general and administrative expenses. This line includes all of 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
Finally, your P&L concludes with net income or profit, calculated by deducting all expenses from total revenue.
To recap, a well-structured P&L for your construction business comprises the following sections:
To Recap
Revenues
Direct Cost of Sales
Indirect Cost of Sales
Gross Margins
Sales and Marketing
General & Admin
Profit
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By following this comprehensive guide and meticulously tracking income and expenses for your construction projects, you can establish an accurate and insightful P&L statement to guide your business's financial success. If you are a construction company and need help choosing and implementing the right ERP, contact us today!
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