Contractors & Trades ~ Tailored Financial Management and Accounting Solutions!

As an experienced and professional contractor or tradesperson, you are most certainly aware of how you carry out your jobs, how to price out your costs and determine the total pricing for your customer's project, as well as when and how you expect to receive your payment. You're doing it... every day, but you may not be recording and tracking it in a manner that is compliant with tax regulations. Keeping accurate and compliant financial records can be very time consuming and may be taking you away from doing what you enjoy - your core business activities. 

Our experience in the financial management and accounting best practices for contractors and trades, combined with today's robust systems and applications allow us to meet all of your unique industry needs. Our services and solutions will be customized and tailored specifically to you and how you want to manage your business so you can get out to the job site and do what you do best. 

1. Project-Based Accounting
2. Tracking Revenue & Expenses
3. Varied Contract Lengths & Cashflow
4. Job Costing & Take-offs
5. Revenue Recognition
6. Billing & Deposits
7. Retainage / Holdbacks
8. Sales Tax Compliance

When do you recognize and record your revenue? Revenue recognition is not as straight-forward as it may seem and there are three types of accounting methods that treat revenue recognition and costs differently, and a couple are more suited to contractors and trades professionals. 

Cash basis is the simplest and most commonly used in general (though not necessarily for contractors).

• You record revenue on the day it actually comes into your bank account.
• You record expenses on the day that you pay for them.
• Contractors with heavy up-front expenses on a project will find this method gives a skewed picture of their finances, and is not the most popular for this industry.

Accrual accounting tracks revenue as it is earned and expenses as they appear, which is frequently different than when the money actually flows into or out of your accounts. 

• The accrual method of accounting uses the "matching principle" which means all profits and related expenses should be recorded in the same period or by project.
• Accrual provides a more accurate depiction of your financial position and is a great fit for contractors.
• *The CRA requires businesses to use the Accrual method of accounting for their tax returns, and although you can use any method in-house, you'll have to revert to Accrual for your return. We recommend Accrual for all of our clients, along with the next method, percentage of completion, incorporated into Accrual for contractors and trades.

Percentage of Completion is the most popular and accurate accounting method for construction and trades professionals, providing the most accurate financial picture of your company at any given time, and it is the most effective means of managing your cash flow. 

• You record your income when it is earned and you invoice based on percentage of work complete, and you allocate your expenses when they are incurred (unless you purchased all of your job materials at the beginning of a multi-month project, then you will allocate the proportion of material expenses during the period they were consumed).
• Projects that are "won-and-done" in a short period of time and do not fit into a staggered % complete model are easily dealt with as a 100% complete project.
• BONUS: the Percentage of Completion method can align perfectly with the Accrual method so that you are also in compliance with the CRA's requirement of Accrual for your taxes.

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Your billing process includes both your billing methods and your billing practices, which you are able to mix and match to a variety of project and customer scenarios. You may opt for a fixed policy that will always be the way that you bill any project, or you might define specific project-types or customers that will receive a certain treatment, i.e. if this... then that. 

It is your bookkeeper that sets up all of your billing forms (quotes, estimates, invoices, credits) and ensures your account settings correctly match your business practices. This is a major part of your accounting system in this industry because you need to track job budgets, create invoices from your estimates and quotes, and have your reports provide you with real-time, accurate data to inform your ongoing project pricing.

Note that "Retainage" can be applied to any of the below billing methods and practices, described in further detail in the next section. 

Fixed Price or Time & Materials are the two primary types of billing in the construction and trades industry. In some cases, you may need to provide an estimate due to uncertainty around a piece of your pricing puzzle. You will likely encounter situations in your business when you would choose any one of these billing types, depending on the length and nature of the job and which one is the most practical for both you and your customer. It's also possible to have a job that uses a combination of these methods for different portions of the project. Your main goal is to ensure you are hitting your profit margin targets while being competitive in your market area.

Fixed Price / Quote: Your customers will often expect to know exactly what the job is going to cost them upon completion and will request a quote. We can set up your quote forms to include your standard terms and conditions to protect both you and your customer. If additional scope is added to the project, you must get agreement in writing for additional charges before proceeding. Your quotes are determined through your preliminary job costing and take-offs, plus the profit margin you expect to make on the job, and finally, you'll want to add a buffer to account for the unexpected. A quote is a legally binding term of your project agreement, and regardless of whether you under- or over-bid at the end of the job, you will bill your customer the quoted amount. If you overpriced the job you will increase your profit margin, but if you underpriced the project you will decrease your profits (and if you really underpriced the job you could end up with a loss). This may be one reason why you would prefer to use estimates whenever possible.

Estimate: In most cases an estimate is preferable over a quote because while you can be very, very good at pricing, it is impossible to know the future about all of the variables that go into your pricing. Weather can cause delays which can increase your labour costs, your usual supplier stops carrying stock on some of your materials which requires you to source it from a new supplier at a higher cost, or one of your subcontractors comes down with the flu and you have to pay two labourers overtime to make up for the loss of your main man. You'll price out your estimate in exactly the same way as a quote, but the terms and conditions on your estimate form will make it clear that it is an estimate only with the final billing amount determined upon completion based on the actuals*. You are not locking yourself into a price but rather allowing yourself some flexibility to adjust your labour and materials as the project demands.

*Note of caution: Just because you provided an "estimate" you do not have carte blanche to charge whatever you want or to be careless with managing your labour and material costs. The BC Business Practices and Consumer Protection Act could consider this to be a deceptive act or practice in relation to a consumer transaction.

--- "... the following constitutes a deceptive act or practice: 

(iii)the supplier's estimate of the price is materially less than the price subsequently determined or demanded by the supplier unless the consumer has expressly consented to the higher price before the goods or services are supplied." ---  

[It would be a consumers advocate or a court that would determine the definition of "materially less" but you can expect it to be in the range of 10% to 15% lower than the final invoice.]

Time & Materials: Ahh, if only your life was this easy. Always being able to bill Time & Materials would be a contractor's dream and reduce stress from the demands of meeting a budget. You simply track all of your time and labour costs (marked up to include profit) and all of your material costs (also, typically marked up a pre-disclosed percentage) and then when the job is done, you send your customer a bill. There's one BIG PROBLEM with your dream billing. The customer RARELY wants a Time & Materials invoice unless it is for a very small job over a short duration, because they have no idea how much the job will cost them in the end, especially when they have no idea how efficient your company is. This is the least competitive pricing strategy in a tough market.

You can use a variety of billing practices in your business to manage your cash flow, revenue recognition, competitive advantage, and customer expectations for the project. 

1. Deposit or Partial Payment upfront (i.e. to cover cost of materials delivered, or due to general uncertainty about credit worthiness).
2. Stepped Payment schedule spread out across the anticipated duration of the project.
3. Percentage Complete Payment can be invoiced at pre-set percentages (i.e. 25% - 50% - 100%), periodically (i.e. at the end of each month - billing a calculated or pre-determined percentage), or in advance similar to a draw mortgage (i.e. 20% upfront, 30% once you reach a specific stage of completion, and the final 50% upon completion).
4. Upon Completion the entire job is invoiced.

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