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New Home Construction

As 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.

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The articles below are business related, 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 you need help, I’m here to assist you. I have deep knowledge about how to set up cost accounting (project accounting) and tie it to financial accounting. Allow me to identify your needs and render solutions.  The changes will greatly impact your bottom line and reduce your stress from the increase in cash flow. Contact me; I usually respond within a few hours. My rates are reasonable and I’m very responsive.

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  • Legal Structures for Contractors

    Legal Structures for ContractorsThere are four different core legal structures a contractor may select. Each has its own restrictions, advantages and distinct issues requiring knowledge to ensure the best selection. This article will cover the four different structures and the variables that give it advantages over the others. Each structure works well given certain underlying conditions. For a ...
  • Mark-Up with Construction

    Mark-Up with ConstructionTo grasp this concept the reader must first understand some history associated with mark-up. Next, a modern approach is adopted which requires an undersanding of hard and soft costs. Once the two types of construction costs are incorporated, the contractor will learn how to read and interpret a basic profit and loss statement. With this ...
  • Control Equals Profit in the Construction Industry (Introduction)

    Control Equals Profit in the Construction Industry (Introduction)Success in construction requires control at both the organizational and field operations level. The owner must set the culture; put into place a structure, create policies, implement systems and use procedures to control the end result. Control the outcome and the contractor will earn a good profit and achieve success.
  • Retainage in Construction – Purpose, Accounting and Law

    Retainage in Construction - Purpose, Accounting and LawA tool used by a developer, contractor or homeowner to keep the primary party committed to getting the project completed is called ‘retainage’. In effect, retainage means to withhold a small percentage of all payments made until all the work is done. The idea is prevent the contractor, subcontractor or vendor from earning their respective ...
  • Construction Management Fee – What is a Good Rate to Charge?

    Construction Management Fee - What is a Good Rate to Charge?With the management fee style of construction, the question for the contractor is: what is reasonable and fair rate to charge as a percentage of costs to build the home? 
  • Billings in Excess

    Billings in Excess‘Billings in excess’ is a construction industry financial term referring to the dollar value of charges to customers in excess of the costs and profits earned to date.  It is reported on the balance sheet in the current liabilities section.  It is in effect, the dollar value the contractor owes back to the customer for ...
  • Hard and Soft Costs With Construction

    Hard and Soft Costs With ConstructionAll hard costs are directly assignable to a job.  These costs are most often tangible in nature, but there are many intangible costs that can be directly assigned to the job.  Thus some intangible costs are ‘Hard’ costs. A contractor must understand the difference between hard and soft costs in order to properly markup assignable costs ...
  • Restoration Contractors – Business Dynamics

    Restoration Contractors - Business DynamicsRestoration contractors face a different set of business dynamics than the traditional new home builder or remodeler. Unlike the builder and remodeler, restoration companies deal with a third party in their contract negotiations and performance. The new home builder uses the market to determine the value of their product, whereas the restoration contractor is ...
  • Setting Up Item Codes for Contractors

    Setting Up Item Codes for ContractorsA common problem for contractors is setting up item codes in their accounting software. Most accountants and bookkeepers fail to fully understand the concepts behind item codes and how it works with the construction industry. This article is designed to explain to you the underlying concepts and how to set up ...
  • Contractor’s Audit Guide – Introduction to IRS Audits

    Contractor's Audit Guide - Introduction to IRS AuditsIn 2009, the Internal Revenue Service issued the Construction Industry Audit Technique Guide (ATG) for use by IRS agents and for contractors.   The contractor’s audit guide explains the processes and methods the IRS uses to examine a contractor.   The end goal is to verify actual taxable income over an assigned tax year for a contractor.  ...
  • Contractor’s Chart of Accounts – Completed Contract or Percentage of Completion Method

    Contractor's Chart of Accounts - Completed Contract or Percentage of Completion MethodThe  contractor’s chart of accounts is significantly different than the traditional chart of accounts.  First off, the layout is more dependent on the balance sheet than the income statement (profit and loss) accounts.   Furthermore, the income statement accounts are laid out to present a resource based costing presentation than a job costing format.   To add ...
  • The Contractor Subcontractor Relationship – An Understanding

    The Contractor Subcontractor Relationship - An UnderstandingWith construction, no other mutual bond has such a high dependency on each other as the contractor subcontractor relationship.   If the relationship is developed properly and with a mutual understanding, it can be very successful.
  • Open Job Cost Status Report

    Open Job Cost Status ReportThe Open Job Cost Status Report identifies a project’s actual costs of construction, amounts borrowed or financed, and any customer payments made to date. The net result is the contractor’s net investment into the respective project.
  • Markup in Construction – Fundamental Understanding

    Markup in Construction - Fundamental UnderstandingMarkup has a very simple definition, it is the amount added onto costs to create a sales price.   Notice something really important with that definition, it does not define profit.   It merely defines how much to charge over costs so you can make a profit.
  • Cost Codes – Subset of Item Codes

    Cost Codes - Subset of Item CodesCost codes are unique identifiers assigned to items in an inventory sold individually or as a part of an assembly. The goal is to track the final outcome of the item(s) sold against the original estimated cost of the item. It is used in both financial and cost accounting.
  • Capitalization of Overhead in Construction – Section 263(a)

    Capitalization of Overhead in Construction - Section 263(a)There are two exceptions allowed for small business residential contractors to escape the requirements of Section 263(a) – Capitalization of Overhead. The first is the $10,000,000 in sales per year threshold. The second exception is allowed for contractors that build residential homes and are able to complete the contract within two ...
  • Profit Standards for Residential Contractors

    Profit Standards for Residential ContractorsProfit standards for residential contractors vary depending on the type of contractor. In general, the net profit standard for contractors in the upper tier of performance range from 5.8% to as high as 9.6% of sales.
  • Using Cash in Construction

    Using Cash in ConstructionThere 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.
  • Work in Process as a Control Account

    Work in Process as a Control AccountA 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.
  • Job Cost Reports – Balance Sheet Set

    Job Cost Reports – Balance Sheet SetConstruction 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.
  • Roofer – Business Dynamics

    Roofer – Business DynamicsRoofers depend heavily on labor to accomplish their task. They are also highly susceptible to weather conditions and dangerous conditions. There are a multitude of issues they face. If properly managed, an owner of a roofing company can make a good living and profit. Experience is absolutely the best ally for the roofer.
  • Markup Percentage for Remodelers

    Markup Percentage for RemodelersIn 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 ...
  • Phase Codes and Cost Codes with QuickBooks and Construction Accounting

    Phase Codes and Cost Codes with QuickBooks and Construction AccountingThe whole goal of financial reports is to gain an understanding of financial performance and identify the key issues for changes to make improvements.  In accounting we referred to this as a continuous feedback loop method of financial improvement.  Insert data, report the data, discover opportunities for improvement; make changes and insert data and begin ...
  • Construction Accounting Terminology

    Construction Accounting TerminologyIn 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.
  • Margins in Construction

    Margins in ConstructionI’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. 
  • Branching Out in Construction

    Branching Out in ConstructionTo reduce risk and provide greater security to all parties the small construction company should consider branching out.  What I mean is adding an additional class or line of construction work to the company’s portfolio so that in hard times there are more opportunities for work.
  • Progress Billings in Construction

    Progress Billings in ConstructionJust 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 ...
  • Construction Accounting – Balance Sheet Construction in Process Accounts

    Construction Accounting – Balance Sheet Construction in Process AccountsConstruction 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 ...
  • Project Accounting Principles for Residential Contractors

    Project Accounting Principles for Residential ContractorsAlmost 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.
  • Flipping Houses – Proper Inventory Turnover Rate

    Flipping Houses – Proper Inventory Turnover RateIn 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 ...
  • House Flipping – Business Dynamics

    House Flipping – Business DynamicsThere 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 ...
  • Contractor’s Profitability

    Contractor’s ProfitabilityIt costs a lot more than you realize to build a home or perform residential repairs. This article looks at both the homeowner’s and contractor’s perspective of what one perceives and the other actually incurs.
  • Use Phase Accounting in Construction – Part III (Walls & Flooring)

    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.
  • Allowances in New Home Construction Contracts – The Business Model

    Allowances in New Home Construction Contracts – The Business ModelThis article is designed to help the contractor address the proper procedures and documentation related to allowances in a new home contract. 
  • QuickBooks in Construction Accounting – Transfer Work in Process to Cost of Goods Sold

    QuickBooks in Construction Accounting – Transfer Work in Process to Cost of Goods SoldQuickBooks does not have a seamless subrountine to transfer costs from construction in process control accout to the profit in loss statement’s cost of construction section. Therefore, the accountant has to export data to a spreadsheet and then sum the respective functional costs of materials, subcontractors, labor, land etc. and then make a ...
  • Using QuickBooks in Construction Accounting

    Using QuickBooks in Construction AccountingThe key to the software is to properly set up QuickBooks to meet your needs.  You lay out a chart of accounting accounts, buckets to dump data into, then identify your classes of work, create the nine phases of costs (QuickBooks uses item numbers) and finally identify the projects.
  • Construction Draw Schedule – Ranch Model Home

    Construction Draw Schedule – Ranch Model HomeThis 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.
  • Implement Cost Accounting in Construction – Processing Documents

    Implement Cost Accounting in Construction – Processing DocumentsIn 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. 
  • Implement Cost Accounting in Construction – Document Flow System

    Implement Cost Accounting in Construction – Document Flow SystemThis 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 – File Structure

    Implement Cost Accounting in Construction – File StructureTaking a small construction company to the next level of financial success requires implementation of 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.
  • How to Calculate the Best Markup for a Construction Project

    How to Calculate the Best Markup for a Construction ProjectEvery 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 ...
  • Percentage of Completion Method for Accounting in Construction

    Percentage of Completion Method for Accounting in ConstructionIn 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. 
  • Completed Contract Method of Accounting in the Construction Industry

    Completed Contract Method of Accounting in the Construction IndustryThe 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 may have a slight tax advantage by deferring revenue recognition but is generally not considered the best ...
  • How to Use Class Accounting in Construction

    How to Use Class Accounting in ConstructionClass 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 Definition of the Different Types of Residential Contractors

    The Definition of the Different Types of Residential ContractorsThere 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.
  • What is a Reasonable Profit in Construction?

    What is a Reasonable Profit in Construction?For any company, profit is based on the risk reward concept.  With 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 residential ...
  • Methods to Reduce Costs in New Home Construction

    Methods to Reduce Costs in New Home ConstructionThere are two primary methods of reducing costs of construction.  The first is cost negotiation and the second is cost shifting.  These two methods have several tools in each to achieve overall price reduction.  The following describes each method and the respective tools within each method that you can use to achieve overall cost reduction.
  • Capitalizing a New Home Builder Business

    Capitalizing a New Home Builder BusinessBankrolling 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.
  • Best Format for the Construction Profit and Loss Statement

    Best Format for the Construction Profit and Loss StatementAs 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 ...
  • What is a ‘Spec’ House?

    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 ...
  • Construction Draw Schedule

    Construction Draw ScheduleA 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. 
  • The Financial Truth about Flipping Houses

    The Financial Truth about Flipping HousesThese 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 in my accounting experience.
  • Use Phase Accounting in Construction – Part II (Trades)

    Use Phase Accounting in Construction - Part II (Trades)This section covers the three traditional trades that require a license from their respective state. This is your HVAC installer, the electrician and the plumber.  In some contractor may wish to include the septic tank and water well installer.  However, I prefer these two be included in the site development phase as they do impact ...
  • Use Phase Accounting in Construction – Part I

    Use Phase Accounting in Construction - Part IThe 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 Model of Excellence

    A Model of ExcellenceBy using a concept of feedback and making changes to the business operation, a model of excellence can be achieved.  This model allows the contractor to not get nickeled and dimed to the point of going out of business.
  • Cost Accounting – Case Study

    Cost Accounting - Case StudyCost accounting is an effective internal accounting process to evaluate company performance at the product/project level.

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