Remodeling bookkeeping: deposits, allowances and change orders

Remodeling jobs are short enough to feel like service work and long enough to behave like construction. A kitchen runs for weeks, takes a deposit, generates change orders, uses three subs and a pile of job-specific materials, and ends with a punch list that can drag on for a month.

Books set up for a service business miss most of that. Books set up for a commercial contractor bury it in process. Remodelers need something in between, and the places it goes wrong are very consistent.

The deposit spiral

This is the pattern that sinks more remodeling companies than bad work does.

A deposit comes in for the next job and goes into the same account as everything else. The current job is running a little over, so the deposit covers its materials. Then the next deposit covers that job's materials. As long as new jobs keep signing, everything feels fine — the account always has money in it. The moment sales slow for a month, there is a job to build and no money to build it with, because that money was spent finishing the last one.

The fix is in the books, not in willpower: deposits recorded as a liability, per job, until the work is done. Then the balance sheet shows, every month, how much of the cash in the bank is actually already owed to customers in work. If that number is larger than the cash, you are in the spiral whether it feels like it or not. See deposits and progress billing.

Some states also regulate home-improvement deposits — how much can be taken up front, and when. Worth confirming what applies to you.

Allowances

Most remodeling contracts include allowances: a budget for the tile, fixtures, cabinets or lighting the homeowner will choose later.

Two things need tracking per job: the allowance, and what was actually spent against it. When the homeowner picks the tile that costs twice the allowance, the overage is a change to the contract and should be billed as one — in writing, before it is ordered. Without an allowance-versus-actual line on the job, overages are simply absorbed, and they are some of the most common margin leaks in residential work.

Change orders are the normal state of affairs

Open a wall in an old house and there is rot, or wiring nobody would sign off, or a joist someone cut through in 1974. Hidden conditions make change orders a normal part of remodeling, not an exception.

Each one should be signed before the work and tracked as its own line against the job, so the original contract and the changes can be seen separately. That tells you two things: whether you are getting paid for changes, and how accurate your original estimates are. See change orders and getting paid, and the change order calculator for pricing one properly.

Job materials and returns

Remodelers buy a lot of material for specific jobs: the vanity, the tile, the hardware, the special-order window. It should be coded to the job when it is bought.

The leak is returns. Material gets returned to the store, the refund lands on the card, and nobody credits it back to the job — so the job carries the cost of materials it never used, and some other account gets a mysterious credit. Worse, store credit issued instead of a refund can disappear entirely. Returns need a job name on them just as purchases do.

Material that is bought for a job and ends up sitting in the shop is worth a periodic look too. That is money spent that is not on any job and not being sold.

Subs, insurance and waivers

Tile setters, electricians, plumbers, drywall crews — most remodelers sub out a large share of the work. For each one: a W-9 before the first payment, a current certificate of insurance with the expiry date recorded, and on larger jobs a lien waiver with payment. The 1099 or W-2 guide covers the classification question, which comes up constantly in residential work.

Milestones, not dates

Progress billing on remodels works best tied to things that visibly happened: demolition complete, rough-in passed inspection, drywall hung, cabinets set, substantial completion. The homeowner can see the milestone, which makes the invoice easier to pay.

Hold back enough of the final payment that the punch list actually gets finished — and record that holdback, because it behaves like retainage whether or not the contract calls it that.

Design fees and financing fees

Design fees — for a design-build firm, or a paid estimate — should be their own income line, and the books should record whether they are credited against the contract if it goes ahead. Otherwise the same money can end up counted twice.

Homeowner financing — when a financing company pays you on the customer's behalf and keeps a fee — should be recorded as the full contract value in revenue and the fee as an expense, not as a smaller net deposit. Recorded net, the fee disappears into the job's revenue and you lose sight of what offering financing actually costs you.

Punch lists and callbacks

Return visits for touch-ups, adjustments and warranty work belong to the original job. Coded as general labor in a later month, they make the original job look better than it was and hide which types of project generate the most callbacks. See what callbacks are really costing you.

Related

• Construction bookkeeping, step by step
• How to bid a job so it makes what you intended
• Why profitable jobs still lose you money

General information, not legal or tax advice. Rules on home-improvement contracts and deposits vary by state.