The approach to recording billings and costs on small jobs is a bit of grey area. Some companies create separate project IDs for every project no matter how small it is, which I think is great. All the billings and costs are assigned to that one ID. Other companies, however, use a more generalized approach and skip project IDs all together for small projects or record billings and costs to different IDs (I'm using ID here because I know each accounting software calls a unique project number/name differently). This can make it more challenging to reconcile contract billings and costs by job to the trial balance. That approach is also not ideal for evaluating the profitability of jobs. Therefore, it's best to consider a different approach when recording billings and costs on small projects.
What's considered a small project is relative to your company's average contract price. If your contracts average out to over $200,000, then jobs under $15,000 may be considered small. One approach could involve recording billings and costs on small jobs to separate general ledger accounts.
If you use QuickBooks and track all jobs large and small using separate project IDs (or "Classes"), be sure you record the costs to each specific job.
Example:
Trial Balance Accounts:
Before: 4000 Construction Revenue
5000 Job Costs: Materials
After: 4000 Construction Revenue
4001 Construction Revenue Small Projects
5000 Job Costs: Materials
5001 Job Costs: Materials: Small Projects
Class:
Before:
After:
Big difference there don't you think?! The John's Bicycle Shop job was a stinker.
If you decide to add separate accounts, be sure to add separate accounts for both billings and costs. The same idea applies to different classes in QuickBooks. I've seen some clients record billings to one specific class while all the costs go to a "catch all" class that includes costs from other small projects. That approach isn't very useful when you're wanting to generate reports for profitability.
Of course you'll need to evaluate how much time and effort needs to go into this change before you dive into it. But I do believe it's something to strongly consider.
I hope that helps!
Thanks!
Ara
ara@thewipreport.com
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