Best Practices for Configuring a Chart of Accounts in QuickBooks Online for Construction Companies

Introduction

A well-structured Construction Chart of Accounts (COA) is a vital tool for maintaining clear financial reporting in any construction company. A COA not only enables you to track your income, expenses, assets, and liabilities but also ensures that you can break down project costs in a way that supports detailed job costing and project profitability. Whether you're using QuickBooks for Contractors or other accounting software, it’s essential to configure your COA properly to meet your business’s unique needs.

In this article, we’ll cover best practices for setting up and maintaining a COA tailored for construction companies in QuickBooks Online. We will also provide insights into managing critical construction-specific accounts like Billings in Excess of Cost, Cost in Excess of Billings, and how to integrate your QuickBooks job costing to improve financial clarity and project management. Check out our Best Practices in Developing a Chart of Accounts for a Construction Company for a more thorough review of general Construction COA Best Practices.

Best Practices for Configuring Your Construction Chart of Accounts in QBO

1. Don’t Overcomplicate Your COA

Keeping your COA simple is crucial. Too many accounts can lead to confusion, making it harder for your team to categorize transactions properly. Stick to essential accounts and avoid unnecessary subaccounts. The flatter and simpler your Construction Chart of Accounts, the easier it is to manage.

2. Add Construction-Specific Accounts

Construction companies require specialized accounts to manage unique transactions such as retention and work-in-progress (WIP). Make sure your COA includes:

Accounts Receivable (AR) Retention

The portion of a payment that is withheld by a client to ensure that the contractor completes the project as agreed. This amount is not due until the project or a specific milestone is reached. Check out our blog about Master Retention in QuickBooks Online - A Contractor’s Guide

Accounts Payable (AP) Retention

The portion of a payment that the contractor withholds from subcontractors or suppliers until the project is completed or a specific milestone is achieved. This ensures that the subcontractors meet the project’s terms and conditions.  Master Retention in QuickBooks Online - A Contractor’s Guide

Work in Progress (WIP):

A financial accounting method that tracks the progress of incomplete projects. It helps monitor the costs incurred compared to the amount billed to clients.

• Cost in Excess of Billings (Asset): Occurs when the contractor has incurred more costs on a project than they have billed to the client. This is treated as an asset on the balance sheet, representing future billing opportunities.
• Billings in Excess of Cost (Liability): Happens when the contractor has billed the client more than the costs incurred on the project. This is a liability, as the contractor owes work to match the billings.
• Over/Under WIP (Income Statement): A measure of whether the project is ahead (over-billed) or behind (under-billed) in its financials. This helps determine if revenue and costs are being properly recognized during the course of a project.

These accounts are essential for tracking project-specific financials and ensuring accurate job costing in QuickBooks.

3. Categorize Expenses into Direct, Indirect, and G&A Costs

For any construction company, it's crucial to categorize expenses clearly. You should separate expenses into three primary categories to improve accuracy in construction accounting:

• Direct Costs: Labor, materials, subcontractors—expenses directly related to individual projects.
• Indirect Costs: Project support costs such as equipment rentals, office overhead, and site supervision.
• General & Administrative (G&A) Costs: Office rent, executive salaries, and other administrative costs that aren't tied directly to project activity.

Organizing expenses this way simplifies reporting and ensures that project profitability can be easily tracked. By using QuickBooks for Contractors, you can easily align these categories with your job costing in QuickBooks to track costs in real-time across various projects.

4. Align Cost Codes with Direct Cost Accounts

Construction companies often rely on detailed cost codes to track project-specific expenses. Ensure your cost codes (or “items” in QuickBooks) align with your direct cost accounts. For example, cost codes for labor, materials, and subcontractor costs should roll up into corresponding accounts in the COA.

This alignment enables more accurate job costing in QuickBooks and ensures consistency across projects.

5. Keep Your COA Flat

Avoid using subaccounts unless absolutely necessary. While subaccounts can provide additional detail, they often lead to confusion and errors when users post to higher-level accounts instead of specific ones. A flat Construction Chart of Accounts keeps things simple, reduces errors, and makes financial reports easier to interpret.

6. Always Use Numbers in Your COA

Using a logical numbering system is a best practice that provides clarity and makes it easier to navigate your financial reports. For example:

• 1000-1999 for assets
• 2000-2999 for liabilities
• 3000-3999 for equity
• 4000-4999 for income
• 5000-5999 for direct costs
• 6000-6999 for indirect costs
• 7000-7999 for G&A expenses

Numbering your accounts systematically ensures that your COA remains organized and easy to follow in QuickBooks for Contractors or other accounting software.

Sample QuickBooks Chart of Accounts

A properly configured Construction Chart of Accounts for a construction company will include the following accounts:

Assets (1000-1999)

• 1000 Cash
• 1200 Accounts Receivable
• 1220 Retainage Receivable
• 1230 Construction in Progress
• 1240 Cost in Excess of Billings
• 1300 Other Current Assets
• 1400 Prepaids
• 1500 Fixed Assets
• 1600 Accumulated Depreciation

Liabilities (2000-2999)

• 2000 Accounts Payable
• 2100 Retainage Payable
• 2200 Billings in Excess of Cost
• 2300 Credit Cards
• 2400 Loans
• 2500 Accrued Liabilities
• 2600 Long-term Liabilities

Equity (3000-3999)

• 3000 Owner’s Equity
• 3100 Retained Earnings
• 3200 Distributions

Income (4000-4999)

• 4000 Construction Revenue

Direct Costs (5000-5999)

• 5000 Direct Labor
• 5100 Direct Materials
• 5200 Direct Subcontractor Costs
• 5300 Direct Equipment Rental
• 5400 Other

Indirect Costs (6000-6999)

• 6000 Indirect Labor
• 6100 Indirect Materials
• 6200 Small Tools and Supplies
• 6300 Equipment Depreciation
• 6400 Safety and Compliance Costs
• 6500 Vehicle and Equipment Fuel
• 6600 Temporary Facilities

General & Administrative Expenses (7000-7999)

• 7000 Salaries - Office Staff
• 7100 Office Rent
• 7200 Office Supplies
• 7300 Professional Fees (Legal, Accounting)
• 7400 IT and Software Expenses
• 7500 Insurance - General Liability
• 7600 Marketing and Advertising
• 7700 Travel and Entertainment

Other Income (8000-8099)

• 8000 Interest Income
• 8010 Gain on Sale of Assets
• 8020 Miscellaneous Income

Other Expenses (8100-8999)

• 8100 Interest Expense
• 8200 Depreciation and Amortization
• 8300 Loss on Sale of Assets
• 8400 Other Miscellaneous Expenses

How to Set Up and Maintain the COA in QuickBooks Online

Manual Setup of COA in QBO

To manually set up or update your Construction Chart of Accounts in QuickBooks Online, follow these steps:

1. Navigate to the Chart of Accounts: Go to the "Settings" gear icon, then select Chart of Accounts under the "Your Company" section.
2. Add a New Account: Click New in the top-right corner to create a new account. You’ll need to specify the type of account (Asset, Liability, Income, etc.) and enter a name and account number.
3. Save and Repeat: After creating each account, click Save and Close. Repeat this process for all necessary accounts.

Importing a COA into QBO

If you have a larger Construction Chart of Accounts or want to import a pre-prepared list, you can do so by following these steps:

1. Prepare Your Spreadsheet: In Excel or Google Sheets, create a spreadsheet with columns for Account Name, Account Type, and Account Number. Ensure that each account is clearly defined.
2. Navigate to Import: Go to the "Settings" gear icon, then choose Import Data under the "Tools" section. Select Chart of Accounts.
3. Upload Your File: Upload your prepared spreadsheet. QuickBooks Online will map the columns and accounts. After reviewing, click Import to complete the process.

Removing Unnecessary Accounts

In QuickBooks Online, you can remove or deactivate accounts that are no longer in use. However, some core accounts cannot be deleted, such as:

• Undeposited Funds
• Opening Balance Equity
• Sales Tax Payable
• Retained Earnings

If you need to "hide" an account, consider renaming it with a number that pushes it to the bottom of your COA. For example, renaming Undeposited Funds as 1999 Undeposited Funds will sort the account to the bottom of the list.

Key Takeaways

• Simplicity is Key: Avoid overcomplicating your Construction Chart of Accounts. A clean and simple structure is easier to manage and reduces errors.
• Use Construction-Specific Accounts: Accounts like AR and AP Retention, along with Cost in Excess of Billings and Billings in Excess of Cost, are essential for tracking project costs and revenue.
• Categorize Expenses Clearly: Organizing your expenses into direct, indirect, and G&A categories provides clarity and helps with job costing in QuickBooks.
• Number Your Accounts: Always use a logical numbering system to maintain a clear and organized COA.

How RedHammer Can Help You

At RedHammer, we specialize in helping construction companies build custom Construction Charts of Accounts that streamline financial reporting and enhance job costing in QuickBooks. Our services include:

• Designing and Implementing Custom COAs: We’ll work with you to create a tailored COA that meets your specific business needs.
• QuickBooks Online Setup: Whether you’re starting fresh or need help restructuring, we can guide you through the setup and maintenance of your COA in QuickBooks for Contractors or other accounting software.
• Accounting System Cleanup: If your financial data is disorganized, we can help clean up your accounting system, ensuring data integrity and accuracy.
• Outsourced Bookkeeping Services: Let us handle your outsourced bookkeeping and financial management while you focus on running your business.

Conclusion

A well-structured Chart of Accounts is essential for maintaining accurate financials and ensuring the success of your construction projects. By incorporating construction-specific accounts like AR and AP Retention and Work in Progress (WIP), you can better track costs and billings, providing greater transparency into project performance. Simplifying your COA and organizing expenses into direct, indirect, and G&A categories ensures your accounting remains manageable while delivering the detailed insights needed for job costing and project management. By following these best practices, you’ll set a strong foundation for financial clarity and long-term profitability in your construction business.

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