Construction Business Owners: Two Accounting Mistakes To Avoid

For construction companies, accounting involves more than just monthly bookkeeping. Contractors consistently manage a variety of projects simultaneously, each at different stages of completion, while also forecasting future projects. It’s important that their accounting practices be adaptable, multifaceted, and thorough. However, contractors frequently face financial reporting challenges, ranging from underperforming budgets to overlooked expenses.

Here are two basic accounting issues commonly encountered by many construction business owners that can lead to major problems.

Among the most prevalent causes of accounting struggles is lack of organization. With every project having different moving parts, keeping track of expenses, invoices and receipts can quickly become overwhelming. Without formalized accounting practices for gathering and organizing information, critical data and important documents can be misplaced, overlooked or just hard to find. Eventually, this can lead to faulty financial reporting as well as unnecessary obstacles to timely collections for work performed.

If you're still using an off-the-shelf general business accounting program or some combination of paper processes and spreadsheets, it could be doing more harm than good. Investing in construction-specific accounting software can help clarify and streamline critical processes.

These software solutions automate tasks and create digital workflows and filing systems. They typically come equipped with features such as expense tracking, invoice management and budget forecasting. Such functionality enables staff to maintain a clear, organized record of financial transactions. Plus, today's cloud-based mobile tools make it quick and easy for authorized team members to input and access financial information, as well as store and locate documents, whenever and wherever necessary.

Failing to reconcile accounts, neglecting to track expenses in real time or relying on manual data entry can introduce errors and discrepancies into the accounting process. Outdated or overlooked procedures not only undermine the credibility of your construction company's financial statements and other reporting, but also can expose your business to compliance issues and legal risk.

If you haven't already, establish standardized accounting processes supported by clear procedures to help ensure accounting consistency. And even if you have established them, most accounting processes and procedures can be improved over time as errors are caught, technology improves and the business grows. Best practices include:

Make sure you've established and are continuously improving sound accounting or accounting-related processes for project managers as well. For example, they should compare actual labor hours and materials costs against each job's budget to assess progress and make adjustments if necessary.

However, before projects even begin, there are accounting concerns to address. Accurate estimates are at the core of every construction business's financial health. They should be as detailed as possible, itemizing all expected costs associated with the job in question. This includes the obvious: labor, equipment, tools and materials, of course. But estimates should also reflect overhead and indirect costs, which can be trickier to identify and quantify.

A good practice for both accounting and estimating purposes is to use an approach called "job costing" to assign a code and dollar amount to every project-related task or activity. Job costing can also help with strategic planning. Done properly, it should reveal over time which types of jobs are profitable and which ones aren't.

Many construction business owners established their accounting processes years, or even decades, ago. Over time, these systems can develop inconsistencies and redundancies. Partnering with a strong firm like CSH will help you maintain some checks and balances to ensure that you are running a tight ship. From reviewing and enhancing your accounting processes to outsourcing them entirely, we can help you maximize your construction business’ accounting potential.

Contact us today and learn more about how we can add value to your organization.