Making sure the books balance is critical for the successful running of any business, whatever its size. However, there are some sectors for which this is more complicated, and the construction industry, a key part of the UK economy, is one of these. It’s a fairly volatile industry, with sometimes dramatically fluctuating profit and loss, which can make bookkeeping challenging for small and medium-sized building businesses.
In addition to this, running a building company often means that several projects will be on the go at once. Each project will have its own individual expenses such as land clearance, bricks, timber, insulation and roofing materials, and may require differing amounts of input from sub-contractors such as plumbers, plasterers, electricians and decorators. If you add in your employed labour costs which may be split unevenly between sites, rental costs for plant hire, different lengths of contracts and phases within them, and the unexpected issues which always seem to crop up on construction projects, the thought of keeping financial tabs on everything may seem rather overwhelming. However, without good bookkeeping, you will run the risk of exceeding your budget and cash flow drying up.
Construction bookkeeping is a specific way of managing finances for a sector in which plans and costs change on a daily basis and timelines often stretch well beyond the initial estimate. It involves carefully tracking the costs of materials and labour in two separate ways; at project level, and at business level.
At project level, the financial details need to be up to date to check whether the project is currently on time and on budget, and that the work is being undertaken safely and correctly. Because of the delays which often characterise construction, such as planning or supply chain issues, project estimates should be updated on a weekly basis.
At business level, bookkeeping must ensure sufficient cash flow, plan ahead for the amount of work and keep close tabs on the profit margin, while allowing for changes such as design updates and material shortages.
Meticulous documentation is crucial, as is noting which invoices, receipts etc are for which project. Depending on the length of a project, some building companies will open a specific bank account for each one which helps keep finances separate and gives a clearer idea of how each is doing.
Compliance with HMRC’s Construction Industry Scheme (CIS) regulations is important if you recruit self-employed individuals to work on site. Many building companies do this in response to ebbs and flows in the workload. CIS rules mean that you are usually obliged to withhold tax from payments to self-employed workers and pay it directly to HMRC, at either 20% if the individual is registered as self-employed on the government website, or 30% if they aren’t.
As if this weren’t complex enough, compliance with the government’s Domestic Reverse Charge (DRC) is also mandatory, applying to all VAT-registered UK construction businesses. This legislation removes VAT liability from the supplier or sub-contractor of a service in the construction industry to the customer, or contractor. This means that as a construction business owner, you are required to account for the VAT due on these services on your VAT return instead of the supplier.
Regular readers of our blogs will know that we recommend the use of bookkeeping software to help small business owners keep on top of their finances. Specific construction bookkeeping software, such as Xero, is available which has built-in compliance with CIS and DRC regulations as well as the government’s Making Tax Digital initiative.
Here at AMR Bookkeeping Solutions, we work with many businesses in the construction industry and are fully conversant with its requirements and parameters. If you’d like to build a relationship with our friendly and expert team, why not call 01892 559480 or contact us through our website.
