Accounting for contractors, built around the job rather than the year.

Which jobs are actually making money

A contractor's year end tells you the business made a profit. It does not tell you that the residential work carried the commercial work, or that one customer has been priced below cost for two years, or that the crew is more productive on smaller jobs than large ones.

Job costing does. Labour, materials, subs and equipment tracked against each contract, so you can see what each one returned rather than what the year returned. Once the bookkeeping is set up to capture it, the reporting costs very little extra, because the transactions are already being coded.

It changes what you bid. Most contractors have a strong instinct about which work is worth taking, and job costing either confirms it or shows them something they had backwards. Both are worth knowing. See customized accounting solutions.

Holdbacks and work in progress

Two things make construction accounting different from ordinary trade accounting, and both are about timing.

Holdbacks under Ontario's construction legislation mean a percentage of every progress payment is retained until the statutory period expires. The money is earned but not received, and how it is recognized for tax and reported on your statements is a question worth getting right rather than guessing at. It also has HST consequences, since the timing of the tax and the timing of the cash do not match.

Work in progress is the cost you have incurred on jobs that are not finished at year end. A contractor with three half-built projects on 31 December has real value sitting there, and it has to be measured and reported.

That is harder than it sounds, because it means knowing what has actually gone into each job rather than what has gone out of the bank account. A contractor with proper job records can answer it. A contractor without them is estimating, and an estimate is the thing that gets questioned. Which is the practical argument for job costing, quite apart from what it tells you about pricing.

Neither is exotic. Both are places a general practitioner without construction clients tends to be slower.

Subcontractor or employee

The highest stakes question in the trades, and the one decided by how the relationship works rather than by what anyone calls it or what the invoice says.

The CRA looks at who controls the work and how it is done, who supplies the tools and equipment, whether the worker can subcontract or send a replacement, whether they can take other work, and who carries the chance of profit and the risk of loss. A sub who works for you exclusively, uses your equipment, is told when to arrive and has no exposure if the job goes badly looks a great deal like an employee.

The exposure runs one way. If a subcontractor is reassessed as an employee, the employer is generally liable for both the employer and employee shares of CPP and EI, with interest and penalties, retroactively. The worker is not the one who pays.

Worth a review before somebody else does one, particularly if your arrangements were set up years ago and have drifted since.

T5018, the reporting most contractors do not know about

If more than half your business income comes from construction, you have a reporting obligation on payments to subcontractors, on the T5018 Statement of Contract Payments.

Who files	Businesses whose primary income-earning activity is construction, meaning more than 50%
What is reported	Payments over $500 in the reporting period to a subcontractor for construction services. Payments purely for goods are not reportable, and mixed payments are where the service element reaches the threshold
When	Six months after the end of the reporting period, which you elect as either your fiscal year or the calendar year
Penalty	$25 per day per failure, with a minimum of $100 and a maximum of $2,500 per failure

Two practical points. You elect the reporting period, so aligning it with your fiscal year usually makes the compilation easier. And you need each subcontractor's business number or SIN, which is far easier to collect when you engage them than to chase afterwards. Ask for it with the first invoice.

The wider context is worth understanding: the CRA now receives a detailed picture of who is paying whom in construction. The same approach was recently extended to trucking, where the penalty moratorium was lifted specifically to address contractor misclassification. See trucking and owner-operators for how that has played out, because the direction of travel is the same.

WSIB in construction

Construction is treated differently from most industries. Coverage requirements extend to people who assume they are outside the system, including independent operators, sole proprietors and partners, and there are limited exemptions rather than a general one for owners.

Two things follow. Check your own position rather than assuming, because the assumption usually runs in the wrong direction. And check the status of the subs you hire, because an uninsured sub can become your problem. Ask for a clearance certificate before work starts, every time, and keep it.

The rest of it

• HST on progress billings. When the tax becomes payable is a matter of the earlier of certain events rather than when you get paid, and on a long contract that can put you remitting tax you have not yet collected
• Equipment. Excavators, trailers, tools and vehicles sit in different capital cost allowance classes, and the buy, finance or lease decision changes both the tax and the cash flow
• Vehicles. Trucks used for work, personal use, and the logbook that supports whatever you claim. See tax tips
• The shop or yard. Owned personally and rented to the company, or held inside it, with different consequences either way
• Bad debts and liens. When an unpaid receivable can be written off, and what happens to the tax you already remitted on it
• Seasonality. Income concentrated in eight months, expenses across twelve, and a tax bill that arrives in the quiet part of the year. Worth planning rather than absorbing

What working together looks like

Bookkeeping that keeps up with the season rather than lagging it, so the numbers are current when you are deciding whether to take on another job. See bookkeeping.

Payroll and subcontractor reporting handled together, since they are the same question asked two ways. See payroll.

And a conversation in the autumn rather than the spring, while equipment purchases, bonuses and the timing of a job's completion can still change the outcome.

Questions