Best Pracices For Working With Contractors Using Quickbooks Desktop Leslie Shiner

5 Best Practices for Working with Contractors Using QuickBooks Desktop
FIVE BEST PRACTICES
For Working with Contractors
Using QuickBooks Desktop
Leslie Shiner
@TheShinerGroup
@LeslieShiner
Leslie Shiner
• Owner of The ShinerGroup
• Financial & management consultant for over 25 years
• MBA in Accounting and Finance from U.C. Berkeley
• Advanced QuickBooks ProAdvisor
• Sage Certified Consultant
• Contributing Columnist
• Remodeling Magazine
• CPA Practice Advisor Top Thought Leader
• CEDIA Fellow
• Author
• A Simple Guide to Turning a Profit as a Contractor
• (www.MoneyMazeBooks.com)
©2016 The ShinerGroup, All Rights Reserved. Reproduction without permission is prohibited. 1
Agenda
• 1 – Using the proper chart of accounts: what is parallelism?
• 2 – Creating and using the perfect Item List
• 3 – Using estimates in all their glory
• 4 – Good job costing practices
• 5 – Tracking and accounting for all labor costs
More Learning Objectives
WSIC? Or: W(tf)SIC?
We only have 50 minutes!
The notes have more information
than we can cover today
Basic Income Statement (P&L)
Multi‐Step Financial Statement
For 12 Months Ended 12/31/XX
The Line
Income $XXX 100%

(COGS) $(XX) xx%
Gross Profit $XXX Gross Margin
(Overhead Expenses) $(XX) xx%
Net Income $XXX xx%
Dollars Percentage
What is Parallelism?
Cost of Goods Sold
Revenue from Materials COGS – Materials

Revenue from Labor COGS – Labor
Revenue from Subcontract COGS ‐ Subcontract
Determine Gross Margin
Determine Gross Margin by Cost Type!
Parallelism – Why Bother?
• What type of work provides the largest source of
profit?
• The least profitable?
• If all profit is built into one source, what happens
when that mix changes?
• How do your clients estimate?
• How do they account for overhead?
• How do they account for profit?
Typical P&L
% of Income
(Margin)
Income $ 1,000,000 100%
(less) Cost of Goods Sold 650,000
Gross Profit 350,000 35%
(less) Expenses 250,000
Net Profit 100,000 10%
Gross Profit = $350,000
Gross Margin = 35%
% of Income
Production Income (Margin)
Labor Income $ 325,000
P&L with Material Income
Subcontract Income
275,000
350,000
Parallelism Other Direct Income 50,000
Total Income 1,000,000 100%
Do the math
Achieved
• What do you Production Costs Margin
learn? Labor Costs 250,000 23%
• Are you charging Material Costs 150,000 45%
Subcontract Costs 200,000 43%
enough for
Other Direct Costs 50,000 0%
labor? Permits? Total Production Costs 650,000 35%
Other costs?
Gross Profit 350,000 35%
Steps to Creating Parallelism
• Change Chart of Accounts
• Be sure all production labor points above the line
• Change the items
• Consider when to make the change to Chart of
Accounts
• Consider affect on prior years
Example:
Five Best Practices
The Perfect Item List:
Doesn’t exist!
But you can make a pretty
good one!
The Item List is the Key
• Items are used for:
• Estimates/Proposals
• Job Costing
• Purchase Orders
• Invoicing
• Use the same items to compare apples to apples
• You may need to change the item description in PO’s
• You may need to use group items to hide the detail on
the estimates or invoices
• Goal: get good estimate vs. actual reporting!
Items – Check Your Priorities
Anything your company buys, sells, or builds
• Most users think in this order:
1. Required on all invoices
2. Provides pre‐entered descriptions on invoices
3. Basis for tracking all inventory
4. Links sales and purchases to your Chart of Accounts
5. Show up on job cost reports
6. Optional for all bills and checks
• Priority should be:
1. Links sales and purchases to your Chart of Accounts
2. Items should be the basis of all job cost reports
Create the ‘Best Practice’ Items
• Customize your items list to see:
• Account (Income account from invoices)
• COGS Account (Cost of Goods Sold)
• Asset Account (inventory items only)
• Create as two‐sided items
• Almost every items should be two‐sided
• Use “This Should Be Zero” account to find errors
• Map all heading accounts to “This Should Be Zero” and
make headings in all caps
Some Items Are Only Used On Invoices
Still needs
to be
two‐sided
For Better Job Cost Reporting
• Use types correctly – order in reports:
• Inventory
• Parts (non‐inventory items)
• Service (items and linked payroll items)
• Other charges
• Use subitems for ease of use and clarity
Less is More!
• Determine the level of detail needed
• Too much detail provides useless reports!
• Apples to apples comparison
• To improve focus, limit number of items on list
• Start with the outcome:
• How do you want your job cost reports to look?
• Then create the list backward from there
• Instead of starting with the detail on bills
More Items List Tips
• Inventory items – use only if you carefully track
specific items
• Must track both purchase and sale of every item by
quantity and price
• Can you do that? Should you need to do that?
• Most contractors who set up inventory shouldn’t have!
• There is a difference between inventory and
consumables
• Consider using numbers in part of the item title
• Organizes lists and reports in order of use instead of
alphabetical order
Example:
Five Best Practices
Estimates as Basis for:
• Progress Invoices (Fixed price job)
• Milestone Invoices (Fixed price job)
• Job Cost Reports
• Job Estimates vs. Actuals Detail
• Job Estimates vs. Actuals Summary
• Basis of Work In Process (WIP) adjustments
Always Create Estimates with Markup
Allows you to compare estimates to actuals for
costs and revenue
Est. Revenue Should Not Equal Est. Cost
• Which Jobs Were Set Up Correctly?
What About Fixed Price Jobs?
• Estimate for job cost reports needs detail
• Estimate for progress invoices needs different detail
• Include both Cost and Sale price on same estimate
• Enter all Cost information
• Enter total cost (or use quantity times cost) in Cost column
• Enter Markup = <100%> in Markup column
• Enter all Sales information
• Enter cost = 0
• Enter total sales price in Markup column
Costs and Sales in One Estimate
Five Best Practices
QuickBooks for Job Management
• It’s not just a check writing or invoicing program!
• Create a rule for items or expenses
• For jobs: always use items
• For overhead: always use expenses
• Do not job cost inside your income statement
• Provide detail of job costs through items, not through
Chart of Accounts
• Value: ability to compare estimate to actual costs
by line item
Keep Costs Under Control
• Use Purchase Orders for subcontracts
• Run Estimate vs. Actual from day one
• Make corrections regularly
• Manage Worker’s Comp and Liability Insurance
through vendors
• Enter Credit Card charges immediately
• Create item called “Unknown”
• You might even need to create “Unknown” job
• Better to overstate job costs than to be surprised
later
Five Best Practices
Payroll & Job Costing in QuickBooks
• Payroll expenses, by default, are set up wrong
• Separate out Gross Payroll from Labor Burden
• Payroll liabilities, by default, are set up wrong
• Use subaccounts to track different payroll liabilities by
agency
• Set up Payroll Compensation items
• Determines where wages will appear on financial
reports
Payroll Options
• Inside QuickBooks
• Outside PR Service options:
• Replicated payroll
• Duplicate every paycheck, but why bother?
• Shadow payroll – automatic net zero paycheck
• Payroll as Vendor through a zero dollar check
Be sure to turn on Manual Payroll (see Help)
Use Standard Costing for Payroll
• Step 1 – Process payroll through QuickBooks
• Create all payroll items and burdens below the line
• Step 2 –Job Cost by including a standard burdened
labor costs to each job
• Payroll item called “Burdened Labor Costs”
• Posted to COGS account
• Offset to “Less Burdened Labor Costs”
• Posted to Expense account
Create Payroll Item to Job Cost
• Addition: Track Expenses by Job
Post to COGS account for Labor
Create Payroll Item to Offset
• Deduction: Do not Track Expenses by Job
Post to Expense account
Set up Employees to Track Labor Costs
• To “convert” hours into dollars
• Need to run payroll based on timesheet
• Set up option for each employee
Five Best Practices
Questions and Thank You
Leslie C. Shiner, MBA
Don’t forget to
join Leslie on
Thursday for
LShiner@ShinerGroup.com
Hiring Right! (415) 383‐6255
www.ShinerGroup.com
www.facebook.com/TheShinerGroup
Twitter: @TheShinerGroup

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