No matter what industry you’re in, accounting is one of those critical tasks that requires diligence and attention to detail. Needless to say, it’s not usually the favorite activity for most business owners or managers. Accounting for a construction company is even more complicated and often cumbersome. There are so many details, departments, and partners to consider that it’s a wonder anyone does it correctly at all!
Accuracy is an attainable goal, though! With a clearly defined goal, powerful tools like construction bookkeeping and accounting software, and a comprehensive understanding of all the factors that go into the process, you can set your construction company up for profitability and success.
To help you avoid costly construction accounting errors, we’ve rounded up some of the more common construction mistakes people make so you can learn how to prevent them. But before we dig in, let’s go over some basics.
Accounting for a Construction Company vs. Traditional Accounting
The main difference between accounting for a construction company and traditional accounting is the amount of variables involved. A typical business sells a specific set of goods from a single location. The overhead costs remain predictable, and the sale of each item closes the same day that the revenue comes in. It’s a straightforward process that works well for a number of organizations.
Accounting for construction companies, however, is constantly in motion. There are job sites in various locations, varied daily travel time, project timelines that start and stop at a moment’s notice, plus an inventory that is almost impossible to predict correctly.
From sales to overhead costs, there are key differences that make the best practices for accounting for construction companies unique. They also make manual bookkeeping frustrating, at best. 😖
Of course, there are some people who are able to manage their books well without the aid of technology or other resources, but let’s be honest—that sounds terrible! For the rest of us, we rely on tech and resources to help follow best practices, identify warning signs regarding our financial health, and maintain quality and accuracy on all construction company financial statements.
Common Mistakes Made in Accounting for Construction Companies
While knowing how to manage your books is helpful, it’s almost more important to know what not to do. Minor mistakes turn into insurmountable debt quickly when you’re trying to manage so many different elements.
To help set you up for success, we uncovered the most common mistakes construction teams make in their bookkeeping. Apply these learnings to your current process to ensure that you don’t create any catastrophic errors.
Inaccurate Overhead Calculations
Construction companies typically must account for high overhead costs in their accounting. Tools, insurance, maintenance, training, and workers’ compensation are all common expenses in construction company financial statements. Other industries don’t have to worry about most of them, so their bookkeeping is less complicated.
Many times, accounting mistakes come when the budget doesn’t attribute enough revenue to overhead expenses. Construction companies often use labor costs to determine how much overhead to allocate.
But, different projects require flexibility in your format. For example, if your new project can be done using more equipment and fewer labor hours, you might under-allocate budget to your overhead costs.
If this happens on a couple projects, you’ll start to accumulate a profit deficit that will put your entire organization in jeopardy. An easy construction bookkeeping tip to remedy this problem is to create a procedure that automatically calculates overhead costs for individual jobs and correctly allocates budget without requiring more information from you.
Cutoff Job Costs
Accrual accounting is common in construction companies. Basically, this means that revenue is recorded when expenses are incurred.
But you can’t always count on paid invoices to be sent in the same time period. And that means your bottom line won’t line up. Many times, your accounting employee will keep track of this information and inform you of any discrepancies.
Mistakes do happen, especially when processes aren’t automated. If you haven’t communicated to your accounting team, you might make decisions about expenses based on inaccurate books. Now, your construction company is vulnerable to closing if any major expenses come up.
This entire situation can be avoided with an automated process that clearly communicates any job cost cutoffs that aren’t accounted for in any given statement.
A reality that all construction companies face is changes to the original plan.
It makes your team agile, flexible, and easy to work with. It also creates a nightmare for your accounting department. Change orders can mean more revenue for your company, but they can also bring new challenges that might put a huge dent in your margins.
Most often, inaccurate forecasting is the reason change orders ruin the profitability of a build. What might have been a thoughtful plan created through detailed job costing turns into an improvised plan that leads to oversights and inaccurate accounting. Sounds like a nightmare, right?
But if you put a procedure in place that gives you time and resources to manage change orders properly and thoughtfully, you’ll be ready for whatever comes your way.
Loss Contract Mistakes
Some jobs are too difficult or too poorly managed to be profitable for your company, but they’re still worth completing for the future opportunities that clients might bring. However, not reflecting the losses in your construction company’s financial statements can lead to huge accounting problems.
Make sure your entire team understands the importance of reporting labor, materials, and other expenses in a timely manner so that your accounting team can identify loss contracts as soon as possible.
Once you have a clear picture of what loss you will incur, it’s easier to help offset the deficit in other ways.
Poor Job Costing
One of the most common mistakes people make while accounting for construction companies is using poorly defined job costing estimates.
If the data in your estimates are wrong or generalized (when you need specific information), your accounting team will create bad estimates. Your bids will be off, and the entire project will likely be a loss for your company.
Using a tool that combines automated bookkeeping with senior accountants like Botkeeper can help you easily create accurate, comprehensive job costing for construction projects. You’ll even have access to detailed reports based on previous projects and estimations for your next bid—and more!
Mitigate Your Risks With the Right Bookkeeping Software for Construction Companies
You might not make all these mistakes while accounting for your construction company, but it’s likely that you will make a few—especially if you don’t set yourself up for success, no matter how long you’ve been in the industry.