General contractor bookkeeping: subs, draws and margin

A general contractor's books have a problem that no trade contractor has in quite the same form: most of the money that comes in is not yours.

It arrives from the owner or the lender and leaves again to subcontractors and suppliers, often within weeks. What stays behind — the fee, the markup, the margin on self-performed work — is a small share of what passed through. So a GC can post a record revenue year and have less to show for it than the year before, and nothing on the top line of the P&L will warn you.

Everything about keeping GC books well comes back to making that small remaining number visible, per job, while there is still time to act on it.

Stop reading revenue

For a GC, revenue mostly measures how much money passed through your account. It is a volume figure, not a performance figure.

The numbers that describe performance are gross profit in dollars, per job and in total, and the overhead that gross profit has to cover. A year of bigger jobs at thinner margins can grow revenue and shrink the business at the same time. If your monthly review starts with the revenue line, move it to the bottom of the agenda.

Cost codes that match the estimate

Job costing for a GC only works if costs land in the same buckets the estimate was built in. Most GCs use a cost code list organised by phase or division — site work, concrete, framing, mechanical, electrical, plumbing, finishes — often a trimmed-down version of the CSI MasterFormat divisions.

The point is not the particular list. It is that the estimate and the actuals use the same codes, so every job can produce a budget-versus-actual report line by line. That is where you find out the framing sub came in on budget and the finishes ran over, instead of simply learning that the job made less than you hoped.

General conditions are job costs

The most commonly misclassified costs on GC books are the general conditions: site supervision, temporary facilities, dumpsters, portable toilets, temporary power, permits, job-specific insurance and bonds, final cleaning.

They exist only because the job exists, so they belong in job cost. Coded to overhead instead, they make every job look more profitable than it was and make overhead look bloated — which leads to exactly the wrong conclusion about where to cut.

Draws and pay applications

On most GC work you are paid through draws: a pay application against a schedule of values, billing each line by its percent complete, often on AIA G702 and G703 forms or a lender's own version.

Two bookkeeping problems follow from that.

The lag. You pay subs and suppliers as the work happens; the draw arrives after it is submitted, reviewed, inspected and approved. On a large job that gap can be the difference between a comfortable month and a tight one. It needs to be in your cash flow forecast as a date, not an assumption.

Billing against progress. What you bill on the pay app and what you have actually earned drift apart. Bill ahead and you are holding money for work you still have to do. Fall behind and you are financing the project. Tracking that gap is the job of the WIP schedule, which on a GC's books is the single most important report.

A related point: sub contracts often carry pay-when-paid or pay-if-paid clauses tying their payment to your draw. How far those are enforceable varies considerably by state, so they are a question for your attorney — but the books should record which subs are on which terms, so you know what is due when.

Retainage runs in both directions

A GC usually has retainage on both sides of the balance sheet: retainage receivable from the owner, and retainage payable to the subs.

Both need their own accounts, per job. Retainage receivable is money you have earned and cannot touch yet. Retainage payable is money you are holding that belongs to someone else — and it is very easy to spend by accident, because it sits in the same bank account as everything else. Books that show the two side by side tell you whether the cash in the account is actually yours. See retainage explained.

Lien waivers with every payment

Before a sub or supplier is paid, collect a lien waiver for the amount — conditional before payment, unconditional once the money has cleared — and track them per job and per payee. Owners and lenders commonly require a full set of lower-tier waivers with each draw, and one missing waiver can hold up the whole payment. The mechanics are in lien waivers explained.

Sub compliance is a bookkeeping job

For every sub: a W-9 before the first payment, a current certificate of insurance with the expiry recorded, and a licence where your state requires one. An uninsured sub's payroll can be added to your own at the insurance audit, which is a cost nobody bid for. Tracking expiries monthly costs minutes; finding out at audit costs a premium adjustment.

Change orders: approved or not

Pending change orders are not revenue. Book them when they are signed, keep the unsigned ones on a separate list, and chase that list every week. The difference between a GC who makes money and one who does not is often simply that the first one got change orders signed before doing the work. See change orders and getting paid.

Two meanings of "draw"

One piece of language that causes real confusion: a construction draw is a payment from the owner or lender against the job. An owner's draw is money you take out of the business for yourself. They are unrelated, and on a surprising number of GC books they end up in the same account. Keep them far apart — see how much should I pay myself for the second kind.

Related

• Construction bookkeeping, step by step
• Getting bonded: what a surety looks at
• The overhead rate calculator

General information, not legal or tax advice. Payment, retainage and lien rules vary by state and by contract.