New Home ConstructionAs an owner of a residential contracting business your profits should average 5 to 9 percent per year.  This profit excludes your personal salary of $80,000 to $120,000 per year.   Therefore, if you are contracting around $1.5 million per year, you should be generating no less than $150,000 per year in take home compensation for your efforts.  If not, you are doing something wrong.  

This section is designed to help the contractor discover how to improve the bottom line and achieve financial success in this industry.

This industry’s scope from the main contractor to the workers of the subcontractors is reviewed.  The articles help establish good models to operate within and develop measurement tools.  Use my experience and learn from my errors and successes to improve your business operation.

Products:  Software/Spreadsheets/Documents

Please understand that below are business related articles.  They are in-depth and educational in nature.  The primary goal of each article is to educate and provide insight, guidance and knowledge to the small business entrepreneur.

If interested in my services as an accountant/consultant; click on ‘My Services‘ in the footer of this article.

  • Cost Accounting – Case Study

    “Pull out your checkbook”.  “OK” the client responds.  I continue, “Now write out a check for $200, and leave the ‘Pay to’ spot blank.  The next time a customer for restoration work calls, get their name and address, write the name in the blank spot and send them the check.  Give them a name of ...
  • A Model of Excellence

    Sharp PencilDuring my 17 years of doing accounting work, I had the privilege of providing temporary controller duties for a new home contractor.  He built custom homes in an upper middle class area.  The homes ranged between $450,000 to $900,000 depending on the square footage, style, and amenities.   I learned a lot about home construction from ...
  • Use Phase Accounting in Construction – Part I

    New Home ConstructionThe most effective form of a financial feedback loop in residential construction is phase accounting.  Phase accounting is a subset of cost accounting and generates accurate information in the world of new home and residential additions for small contractors building up to 20 houses per year. A financial feedback loop is a method used in business ...
  • Use Phase Accounting in Construction – Part II (Trades)

    The most effective form of a financial feedback loop in residential construction is phase accounting.  Phase accounting is a subset of cost accounting and generates accurate information in the world of new home and residential additions for small contractors building up to 20 houses per year. There are five remaining phases to cover in this form ...
  • The Financial Truth about Flipping Houses

    During my recent vacation, I had the chance to watch one of those reality shows about flipping real estate.  These two partners in Texas bought a house, fixed it up, and then sold the house.  The show illustrated that they made $52,000 from the deal.  Really?  I have yet to see a deal like that ...
  • Construction Draw Schedule

    A construction draw schedule is a financial tool used by contractors in identifying percentage of completion points in the project for the bank to advance proceeds to the contractor. The construction draw schedule is instrumental in keeping the project moving along.  Without good points in the schedule to draw funds, the contractor can run out ...
  • What is a ‘Spec’ House?

    When a builder constructs a house without a contract, it is known as a spec house or a speculation home.  There are several advantages to the builder to build a spec house including timing, financial gains and workforce retention.  There are advantages to the buyer to purchase a spec house as well.  These include no ...
  • Best Format for the Construction Profit and Loss Statement

    As a construction company owner, you need a profit and loss statement that conveys information in a format that will identify how much you are truly making as a profit.  The best format is a construction profit and loss statement identifying contract revenues, direct costs, indirect costs and the overhead expenses.  This format most closely ...
  • Capitalizing a New Home Builder Business

    Bankrolling any startup business is difficult enough.  Capitalizing a new home builder operation is a leap forward in required funds.  Typically, small businesses can be capitalized on a shoestring budget, for a new home contractor, just a little bit isn’t going to work.  Most lending institutions require that the project is funded to the tune ...
  • Methods to Reduce Costs in New Home Construction

    This article describes methods to reduce the overall cost of construction for a new home.  The new home construction industry has been hit hard by the devaluing of real estate during the four year period of 2008 to 2012.  There is no reliable source indicating any increase in real estate market value for the foreseeable ...
  • What is a Reasonable Profit in Construction?

    For any company, profit is based on the risk reward concept.  So in construction, what should be the profit (reward) given the risk?  What is a reasonable expectation given the industry and the particular business?  There is no single correct answer.  The construction industry is divided into several significant branches.  This article is focused on ...
  • The Definition of the Different Types of Residential Contractors

    There are about a half a dozen types of residential contractors.  Each has a different function and goal, this article describes the different types of residential contractors and provides guidance to the reader in understanding the corresponding definition. Below are a brief definition, description and example of the different types of residential contractors:         ...
  • How to Use Class Accounting in Construction

    Markup CalculatorClass accounting is a form of accounting whereby the revenues and direct costs are grouped into divisions within the company.  It is a very effective form of accounting in construction.  Learning how to use class accounting in construction is easy and works extremely well with phase accounting. The following describes class accounting especially as it relates ...
  • Completed Contract Method of Accounting in the Construction Industry

    The completed contract method of accounting recognizes revenue and the associated costs once the project is complete.  This is one of the two popular accounting methods used in the construction industry.  For residential contractors, the completed contract method has a tax advantage by deferring revenue recognition but is generally not considered the best method of ...
  • Percentage of Completion Method for Accounting in Construction

    In construction accounting, the percentage of completion method is the preferred tool to account for revenues and direct costs of construction.  If you are an owner of a contracting business, this is the best method of accounting.  Learn how percentage of completion method for accounting in construction is calculated and recorded in the financial books ...
  • How to Calculate the Best Markup for a Construction Project

    Every construction project has costs beyond the direct costs and the contractor wants to earn a profit.  To cover these costs he must have an appropriate markup.  The contractor must give consideration to many variables and circumstances to calculate the best markup for a construction project.  To determine the best markup percentage on costs, the ...
  • Implement Cost Accounting in Construction – File Structure

    To take the small construction company to the next level of financial success, you must implement cost accounting.   This article is one in a series designed to illustrate how you implement cost accounting in a small construction business.  The first step in this process is design a file structure.  This includes creating a project numbering ...
  • Implement Cost Accounting in Construction – Document Flow System

    This is the second article in a series of articles walking the small business contractor step by step in implementing cost accounting in construction.  This article focuses on designing and developing a document flow system for use in cost accounting.   The next step after creating a document flow system is learning how to sort and ...
  • Implement Cost Accounting in Construction – Processing Documents

    In construction there is little respect for processing paperwork.  Contractors want to build projects, not deal with how paper is managed.  But to gain a true understanding of what it costs to build a project and implement cost accounting, the contractor has to process documents in a meaningful way.  To successfully implement cost accounting in ...
  • Construction Draw Schedule – Ranch Model Home

    This is a basic draw schedule explanation for an A-frame ranch model home.  This article details the draw schedule format illustrated below.  It details the approximate percentages for the respective phases of construction and explains how the draw schedule is laid out and works.  In addition it details the respective four draws customarily taken on ...
  • Using QuickBooks in Construction Accounting

    Over the last 17 years I have become a fan of QuickBooks over other accounting software.  Having been involved in construction accounting, I have set up over 9 different construction clients on this software.  Overall it is the easiest and one of most widely accepted accounting software to use in the market today.  This article is ...
  • QuickBooks in Construction Accounting – Transfer Work in Process to Cost of Goods Sold

    I want to thank two readers for asking about this issue.  While reading Using QuickBooks in Construction Accounting they noticed that I failed to explain how to transfer the costs of construction to the profit and loss statement.  In effect, how do you move these individual costs over to the costs of goods sold section ...
  • Allowances in New Home Construction Contracts – The Business Model

    Allowances in ConstructionIn almost every new home construction contract that I reviewed as an accountant, I saw where the contractor would lose several thousand dollars in this area of his business.  In every case, the situation was the same, there was no mutual understanding between the home buyer and the contractor.  Invariably, the contractor paid out significantly ...
  • Use Phase Accounting in Construction – Part III (Walls & Flooring)

    The primary goal of phase accounting is to break out the construction costs into distinct groups in order to assist management in identifying issues related to cost overruns or profitability.  This is a function of the feedback loop method of management which I am advocating to all readers.  Again, the process is simple:  simply see ...
  • Contractor’s Profitability

    I’m surprised at how many visitors to this section of the website are oriented to what is a fair profit for a contractor.  I’m not referring to the industrial or the commercial contractor; I’m referring to your standard residential contractor. To resolve this, I’m going to approach this from two perspectives.  The first is the ...
  • House Flipping – Business Dynamics

    There is a lot of misinformation about flipping real estate on the internet and on television.  I’m mostly shocked by the lack of detailed information related to the entire cost of the project and the adjusted sales price.  I have yet to read a single article that goes into the details of the business dynamics ...
  • Flipping Houses – Proper Inventory Turnover Rate

    Turnover Rate with Flipping HousesIn your typical business operation, turning the inventory over as often as possible has several benefits.  First, it generally reduces overall costs, secondly, it generates greater profits and third, by increasing the profitability, the company has a greater return on equity.  OK, this seems all well and good, but does turning the inventory over in ...
  • Project Accounting Principles for Residential Contractors

    Almost every residential contractor I had as a client had no clue of their financial position as it related to any one of their residential contracts.  None of them knew whether the project was fully funded, over funded or unfunded at any point in the construction process.  The only time they knew if they made ...
  • Construction Accounting – Balance Sheet Construction in Process Accounts

    Construction accounting consists of three major groups of accounts.  The first and most understood set are the accounts found on the profit and loss statement.  Customarily referred to as Cost of Goods Sold or Costs of Construction, these accounts convey the total costs of construction against the revenue earned for those contracts.  The second major ...
  • Progress Billings in Construction

    Just like a tip of an iceberg, a progress billing for a construction project is an invoice for a small part of the overall contract value.  It needs to be recorded correctly and presented to management in a way that is understandable and beneficial for making decisions.  This article will introduce the concept and cover ...
  • Branching Out in Construction

    When you own a small construction company many people depend on you.  There is your family, employees and subcontractors.  A typical $2,000,000 per year operation will have upwards of 20 people dependent on the contractor for their livelihood.  This can get stressful and overwhelming for the contractor especially if they are only involved in one ...
  • Margins in Construction

    I’ve been asked to identify the average margins in the construction industry.  Honestly, there is no such thing.   I tried and after several hours of research I couldn’t even get one of the types of contractors to have consistency in their numbers.  So I think the better question is ‘What should be my margin?’  The answer ...
  • Construction Accounting Terminology

    In construction accounting accountants and bookkeepers use certain terms and there are distinct meanings associated with these terms.  This article is designed to introduce beginner accountants and contractors to these terms from the perspective of financial reporting.  If you are a contractor, the term used by accountants may have a different meaning than how the ...
  • Phase Codes and Cost Codes with QuickBooks and Construction Accounting

    An interesting question was posed to me by a reader in the construction industry.  In his company the costs go directly to the Profit and Loss Statement via cost codes with QuickBooks.  Naturally he has read several of my articles and he wants to know why use phase codes?  If so, what is the difference ...
  • Markup Percentage for Remodelers

    In the construction industry, remodelers face a different set of criteria than your traditional new home builder.  Because of these issues the markup percentage on costs is generally much higher than other forms of construction.  If you are a remodeler, you need to understand the impact of these issues and how to properly markup your ...
  • Roofer – Business Dynamics

    Within the residential construction industry is a subset referred to as ‘Trades’.  Within this group exists one particular trade that has its own set of business dynamics.  Roofers depend heavily on labor to accomplish their task.  They are also highly susceptible to weather conditions and dangerous situations.  There are a multitude of issues they face.  ...
  • Job Cost Reports – Balance Sheet Set

    Construction accounting uses job cost reports to inform management of progress and existing issues with projects.  There are several different sets of reports.  The balance sheet set functions as an overall financial picture for the company.  The balance sheet set informs us of four overall monetary pieces of information: It basically identifies how much is owed ...
  • Work in Process as a Control Account

    A control account in the Chart of Accounts is used when there is a need to separate multiple third parties with a similar function. Work in process works perfectly as a control account. In this article I’m going to explain the old method used to track projects and how the control account makes entering data faster. ...
  • Using Cash in Construction

    There is a notion in business that using cash to pay for materials or service is illegal.  IT IS NOT ILLEGAL TO PAY FOR MATERIALS OR SERVICE WITH CASH.  It is illegal to do this if you do not properly document the transaction.  This is especially true in the construction industry. This article is going to ...

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