How to Configure QuickBooks for an A/E Firm
The Setup Most Firms Never Got — and What to Do About It
QuickBooks can support correct A/E firm accounting. The problem is that it ships with defaults built for retail and generic service businesses — and most A/E firms were set up by accountants who never knew to configure it differently. Here is the complete setup guide: chart of accounts structure, payroll account separation, COGS configuration, reimbursable income, and the journal entry process that makes the overhead factor calculation possible.
What This Guide Covers — and What It Doesn't
This article is a practical configuration guide. It covers the specific QuickBooks settings, accounts, and processes that produce a correctly structured A/E firm P&L — one that supports the overhead factor calculation, makes net revenue visible, and separates direct labor from overhead labor.
It does not cover every QuickBooks feature. It does not cover payroll processing, bank feeds, accounts receivable management, or tax preparation. Those topics are covered in QuickBooks' documentation and by the firm's accountant.
What it covers is the A/E-specific configuration that generic QuickBooks setup guides and generic accountants consistently miss — the structural decisions that determine whether the accounting system can produce the financial metrics an A/E firm actually needs.
Before starting, confirm you have access to QuickBooks as an administrator. Chart of accounts changes and account creation require admin access. If the firm works with an outside bookkeeper or accountant, include them in this process — the changes made here will affect how they code transactions going forward, and their buy-in makes the new structure sustainable.
The goal of this configuration
When correctly configured, QuickBooks should produce a P&L that:
- Separates consultant fees and direct project expenses into COGS — making gross profit equal net revenue
- Shows payroll in two distinct expense accounts — Payroll Direct and Payroll Overhead — enabling the overhead factor calculation
- Tracks reimbursable income in its own income account — keeping design services revenue clean
- Supports the per-pay-period journal entry process that allocates payroll correctly each period
Everything else in A/E firm financial management — overhead factor, net multiplier, billing rates, project profitability — flows from this foundation.
QuickBooks can support correct A/E firm accounting. The problem has never been the software — it has been the configuration.
The changes described here are structural corrections, not workarounds. Make them once, and the accounting system produces accurate data indefinitely
Step 1 — Configure the Chart of Accounts
The chart of accounts is the foundation. Every other configuration step depends on getting this right first.
Create or verify the Income accounts
Navigate to Chart of Accounts and confirm or create two income accounts:
Design Services — the primary professional fees account. All billable design and consulting fees go here. If the firm has multiple practice areas or disciplines that warrant separate revenue tracking, subcategories under Design Services can be added — but a single account is sufficient for most small A/E firms.
Reimbursable Income — a separate income account for amounts billed to clients for reimbursable expenses. This account must be distinct from Design Services. Mixing reimbursable billings into Design Services inflates the professional fees figure and distorts revenue analysis.
Configure Cost of Goods Sold
Create or verify two COGS accounts:
Consultants — for all amounts paid to subconsultants. Record what was actually paid to each consultant here, at the time of payment. This account tracks spending — not billing. How consultant costs are billed to the client, whether at cost or with a markup, is handled at the invoice level and has no bearing on how the cost is recorded in this account.
Direct Expenses — for costs incurred specifically for individual projects. Permit fees, project-specific travel, printing, and specialty testing belong here when the costs are incurred—not when or whether they are billed to the client. A permit fee paid on a client's behalf is recorded in Direct Expenses on the day it is paid. Whether it appears on the next client invoice as reimbursable is a separate billing decision.
Direct labor does not belong in COGS under any circumstances. If the firm currently has a labor or payroll account in COGS, it must be moved to expenses. This is the single most important structural correction in the entire configuration.
Configure the Payroll Expense accounts
This is where most A/E firms need to make changes from the QuickBooks default.
Create two expense accounts:
Payroll Direct — for compensation allocated to hours charged to client projects. This account will be populated via journal entry each pay period based on direct labor figures from the project management system.
Payroll Overhead — for compensation allocated to all other firm time. Administration, marketing, management, internal meetings, business development, and training.
If the firm currently has a single payroll expense account — labeled something like "Payroll Expense," "Salaries," or "Wages" — do not delete it yet. Leave it in place until the journal entry process is running correctly for at least one full pay period. Then reclassify the account or retire it once the new accounts are confirmed to be working.
Create one additional payroll-related account:
Payroll Taxes and Benefits — for employer payroll taxes, health insurance contributions, and retirement plan contributions. Carry these as a single overhead expense. Allocating them proportionally between direct and overhead payroll adds complexity without meaningfully improving the overhead factor calculation.
Configure the remaining overhead expense accounts
Review the existing overhead expense accounts against the chart of accounts structure covered in the chart of accounts article. Confirm that all overhead costs — rent, insurance, equipment, marketing, professional development, office operations, banking, and utilities — have appropriate accounts and that no overhead costs are currently sitting in COGS.
The specific account names and organization can vary by firm preference. What matters is that every cost of running the firm that is not a direct project cost sits in expenses — visible, consistently coded, and separate from the COGS accounts that define net revenue.
The most important change in the chart of accounts is creating two separate payroll expense accounts — Payroll Direct and Payroll Overhead.
Without that separation, the overhead factor cannot be calculated, billing rates cannot be built from real cost data, and every financial metric that depends on the overhead factor is unavailable. Moving direct labor out of COGS is also necessary — but the payroll separation is what makes the accounting system produce useful numbers every pay period going forward.
Step 2 — Set Up the Payroll Journal Entry Process
The payroll journal entry is the mechanism that allocates payroll dollars to the correct expense accounts each pay period. It cannot be automated within QuickBooks alone — it requires direct labor figures from the project management system.
What the journal entry does
Standard QuickBooks payroll processing records the total payroll as a single transaction — typically a debit to a payroll expense account and a credit to the bank or payroll liability account. The journal entry redirects those payroll dollars from the single account into the correct split between Payroll Direct and Payroll Overhead.
What you need before making the entry
From payroll processing — the total gross payroll for the pay period. QuickBooks already has this.
From the project management system — the direct labor figure for the pay period. This is the dollar value of all hours logged to active client project phases during that pay period. BaseBuilders produces this as a payroll separation report — direct labor dollars by employee for the period, derived directly from time entries logged to project phases.
Without a project management system that generates this figure automatically, calculating it manually requires pulling time entries for every employee, converting hours to dollars at each person's pay rate, and verifying the total against gross payroll. For a firm with more than a handful of employees processing payroll every two weeks, that manual process is not sustainable. The journal entry gets skipped. The overhead factor becomes stale. The whole accounting structure that the rest of this silo depends on stops working.
Total payroll minus direct labor equals overhead labor. These three figures are what the journal entry uses.
How to make the entry
In QuickBooks, navigate to the Journal Entry screen and create the following entry at the time payroll is processed for each pay period:
- Debit Payroll Direct for the direct labor dollar amount
- Debit Payroll Overhead for the indirect labor dollar amount
- Credit the payroll clearing account or bank account for the total payroll amount
The debits must equal the credit. Total payroll is the control figure — the journal entry simply redirects it into the correct expense buckets.
Timing
The journal entry must be made per pay period — not monthly. Because pay periods frequently span month-end boundaries, a monthly entry would require splitting a pay period's time data across two accounting periods or using approximations for incomplete periods. Either approach introduces timing errors that compound across the year. The pay period is the natural unit. Make the entry at the time each payroll is processed.
Verifying the entry is working correctly
After the first few pay periods, run a P&L and confirm:
- Payroll Direct shows the expected direct labor dollars for the period
- Payroll Overhead shows the remaining indirect labor dollars
- The sum of both accounts equals total gross payroll for the period
- No payroll dollars remain in the old single payroll account once it has been fully transitioned
The ratio of Payroll Direct to total payroll should fall between 55 and 70 percent for most A/E firms. If it is significantly outside this range, investigate whether overhead time is being incorrectly charged to projects or whether utilization has shifted materially.
The journal entry process is what makes the overhead factor calculable.
A firm that runs the entry every pay period has an overhead factor based on real, current data. A firm that skips it has a number that becomes less accurate with each passing period.
Step 3 — Configure Reimbursable Income and Verify the Full P&L Structure
With the chart of accounts corrected and the journal entry process running, two final configuration steps complete the setup.
Configure reimbursable income billing
When a client is billed for reimbursable expenses — permit fees, travel, printing, and similar costs recovered through invoicing — the billing must flow to the Reimbursable Income account, not to Design Services.
In QuickBooks, this is configured at the invoice or service item level. Create a service item called "Reimbursable Expenses" or similar, mapped to the Reimbursable Income account. When reimbursable amounts are added to client invoices, use this item rather than the design services item.
The corresponding cost — what was actually spent on the reimbursable item — was already recorded in Direct Expenses under COGS when incurred. The Reimbursable Income account captures the recovery billing separately. The net effect on net revenue is the markup earned on the reimbursable — typically a small percentage above cost.
A firm that bills $115 for a permit fee that cost $100 has $100 in Direct Expenses and $115 in Reimbursable Income. Net contribution: $15 — the markup. Clean, accurate, and consistent with the net revenue calculation throughout this silo.
Verify the complete P&L structure
Once all accounts are configured and at least one pay period journal entry has been made, run a P&L and verify the following:
Income section shows Design Services and Reimbursable Income as separate line items. No payroll, labor, or project cost appears in the Income section.
COGS section shows only Consultants and Direct Expenses. No payroll or general overhead appears here. Gross Profit — which should now equal net revenue — is visible as a subtotal between COGS and Expenses.
Expenses section shows Payroll Direct and Payroll Overhead as separate line items. The sum of both equals total gross payroll for the period. All other overhead costs appear in consistently named expense accounts below payroll.
Net Income is correct — total income minus COGS minus expenses.
If the P&L structure matches this description, the configuration is complete. The overhead factor calculation can now be run from this P&L using real, current data. Billing rates built from the resulting overhead factor are defensible. Net revenue is visible and correctly calculated. Project and firm-level performance can be measured against the right denominator.
What to do with prior period data
Prior periods coded under the old chart of accounts structure do not need to be restated. The structural correction applies from the date it is implemented going forward. For the overhead factor calculation, use trailing 12-month figures once enough correctly coded periods have accumulated. In the interim the current period data produces a useful estimate — and a slightly approximated overhead factor based on real current data is significantly more actionable than no overhead factor at all.
Document the date of implementation and the accounts affected. Any future accountant or bookkeeper needs to understand why the chart of accounts is organized the way it is — and why periods before the implementation date look different from periods after it.
The ongoing process
With the configuration complete, the recurring work is straightforward:
Each pay period — make the journal entry allocating payroll between Payroll Direct and Payroll Overhead using direct labor figures from the project management system.
Every three to six months — run the trailing 12-month P&L, recalculate the overhead factor, and review billing rates against the updated floor.
Annually — review the full chart of accounts structure with the firm's accountant. Confirm that all accounts are still correctly configured, that no new expense categories have been miscoded, and that the structure continues to support the overhead factor calculation and net revenue analysis.
The configuration described in this article is not a one-time exercise. It is the foundation of an accounting system that produces accurate, actionable financial data for as long as it is maintained correctly.
→ Read: Financial Metrics for A/E Firms
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