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.

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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:

Navigate to the Chart of Accounts: Go to the "Settings" gear icon, then select Chart of Accounts under the "Your Company" section.
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.
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:

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.
Navigate to Import: Go to the "Settings" gear icon, then choose Import Data under the "Tools" section. Select Chart of Accounts.
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.

Frequently Asked Questions About Configuring Chart of Accounts in QuickBooks Online for Construction

Why is a well-structured Chart of Accounts important for construction companies?

A well-structured Chart of Accounts (COA) is vital for construction companies because it enables accurate financial reporting, detailed job costing, and project profitability analysis. Unlike general businesses, construction companies need to track project-specific costs, manage work-in-progress reporting, handle retention amounts, and separate direct costs from indirect and general administrative expenses. A properly configured COA supports QuickBooks job costing functionality, ensures compliance with construction accounting standards, provides clear visibility into project performance, and enables accurate financial reporting for stakeholders. Without proper COA structure, construction companies struggle with inaccurate job costing, poor project profitability analysis, and unclear financial reporting.

What construction-specific accounts should be included in a QuickBooks Online Chart of Accounts?

Construction companies require specialized accounts including Accounts Receivable Retention (asset) to track portions of payments withheld by clients until project completion; Accounts Payable Retention (liability) for amounts withheld from subcontractors; Work in Progress accounts including Cost in Excess of Billings (asset for costs incurred but not yet billed) and Billings in Excess of Cost (liability for amounts billed exceeding costs incurred); and Over/Under WIP accounts for income statement reporting of project billing status. These accounts are essential for accurate job costing, proper revenue recognition, retention management, and work-in-progress reporting that construction companies require for financial accuracy and compliance.

How should construction expenses be categorized in the Chart of Accounts?

Construction expenses should be categorized into three primary categories for clarity and accurate job costing: Direct Costs (5000-5999) including labor, materials, and subcontractors directly related to individual projects; Indirect Costs (6000-6999) covering project support costs like equipment rentals, small tools, safety compliance, and site supervision; and General & Administrative Costs (7000-7999) for office rent, executive salaries, professional fees, and administrative expenses not tied directly to projects. This categorization enables accurate project profitability tracking, proper overhead allocation, clear cost reporting, and effective job costing in QuickBooks while ensuring compliance with construction accounting standards.

What numbering system should be used for construction Chart of Accounts?

A logical numbering system provides clarity and organization: Assets (1000-1999), Liabilities (2000-2999), Equity (3000-3999), Income (4000-4999), Direct Costs (5000-5999), Indirect Costs (6000-6999), and General & Administrative Expenses (7000-7999). This systematic approach ensures the COA remains organized, makes financial reports easier to navigate, enables consistent account coding, facilitates proper account grouping for financial statements, and provides room for adding new accounts within appropriate categories. Numbering also helps maintain consistency across projects and makes training new staff easier.

Should construction companies use subaccounts in their QuickBooks Online Chart of Accounts?

Construction companies should avoid using subaccounts unless absolutely necessary and keep the COA as flat as possible. While subaccounts can provide additional detail, they often lead to confusion and errors when users post to higher-level accounts instead of specific subaccounts. A flat structure reduces coding errors, makes financial reports easier to interpret, simplifies training for new users, reduces the complexity of account selection, and minimizes posting mistakes. Instead of using subaccounts, companies should rely on QuickBooks' class and location features or detailed cost codes for project-specific tracking while maintaining a simple account structure.

How should construction companies align cost codes with their Chart of Accounts?

Cost codes (or "items" in QuickBooks) should align directly with direct cost accounts in the COA. For example, cost codes for labor, materials, and subcontractor costs should roll up into corresponding accounts like Direct Labor (5000), Direct Materials (5100), and Direct Subcontractor Costs (5200). This alignment enables accurate job costing in QuickBooks, ensures consistency across projects, facilitates proper cost allocation, simplifies financial reporting, and provides clear visibility into project-specific expenses. The alignment also supports detailed project profitability analysis and helps maintain accurate work-in-progress reporting.

What's the best way to set up a Chart of Accounts in QuickBooks Online for construction?

The setup process involves several options: Manual Setup by navigating to Settings > Chart of Accounts and adding accounts one by one with proper account types, names, and numbers; or Import Method by preparing a spreadsheet with Account Name, Account Type, and Account Number columns, then using Settings > Import Data > Chart of Accounts to upload the file. For larger construction companies or comprehensive setups, importing is more efficient. The process should include removing or renaming unnecessary default accounts, setting up construction-specific accounts for retention and WIP, and organizing accounts with proper numbering systems. Professional guidance often ensures optimal setup.

How can construction companies maintain and optimize their Chart of Accounts over time?

Ongoing COA maintenance involves regular reviews to ensure accounts remain relevant and properly used, periodic cleanup to remove or rename unused accounts, consistent training for staff on proper account coding, regular analysis of account usage to identify needed adjustments, and alignment with changing business needs as the company grows. Companies should avoid frequent changes that disrupt financial reporting consistency, maintain documentation of account purposes and coding guidelines, conduct periodic reviews with accounting professionals, and ensure new accounts follow established numbering and categorization principles. Regular maintenance helps preserve financial data integrity and reporting accuracy.

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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