Four Common Construction Accounting Mistakes Contractors Should Avoid
By John Stenger, CPA, Owner, Stenger & Company
In construction, often what separates good contractors from great ones comes down to the details. Finding someone to complete a mechanical, electrical or plumbing project isn’t difficult but finding a true expert that will perform to perfection is. Since most contractors are not construction accounting experts by trade, mistakes can occur when organizing a company’s finances. The more a contractor can identify these common mistakes, the easier it will be to avoid common pitfalls. As a construction-specific CPA, here are the common construction accounting mistakes made by contractors:
1. Not Choosing the Right Accounting Advisor or Going it Alone
Most contractors are entrepreneurial at heart. They welcome the challenges that come with running a business and don’t mind rolling up their sleeves and wearing many hats. While this spirit is certainly a noble one, it’s not recommended when it comes to organizing constructing accounting procedures or overall company finances. Choosing the right Certified Public Accountant (CPA) is a critical step to building out your trusted advisor team and can be a major contribution to business growth. Close to half of my clients come to me from other CPAs that were not construction specialists. The unique accounting requirements a contractor is faced with almost always call for a CPA that specializes in construction.
2. Lack of Accurate Job Cost Accounting
When it comes to job profitability, risk mitigation is critical for success. The best way to mitigate the risk of unprofitable jobs is through implementing job cost accounting methodologies. Job cost accounting is the process of tracking, organizing and interpreting all the costs associated to a job to determine overall profitability. If done correctly, job cost accounting will result in “buckets” of information for each job that the trusted CPA or business owner can review and make decisions on. The three main “buckets” to track in detail are:
- Materials – Organizing the costs of raw material and assigning these costs to a job once the materials are used
- Labor – Charging employees’ time to specific jobs which are then assigned to the jobs based on the labor cost of the employee
- Overhead – Accumulating overhead costs into cost pools, and then allocating the costs to specific jobs.
Having a clear picture on this data will help resolve job inefficiencies and create real-time visibility on overall profitability.
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3. Not Hitting Targets on Job Estimates
As a contractor begins to build historical job cost data, producing accurate and timely estimates will become an easier process. Underestimating a project means you have to go and invoice more to maintain profitability, or even worse, take a loss on the job. This can also reverberate into future jobs kicking off a vicious cycle of how to make up for an unprofitable job. A contractor might try to win a bid by knowingly underestimating their next job just to create enough cash flow to cover the previous unprofitable job. Or they could overestimate the next job. Overestimating a project can seem harmless, but if a contractor is consistently overestimating jobs, they are probably losing business by providing an estimate that is much higher than the competition.
4. Inadequate Construction Accounting Software
Most of my clients come to me because they are experiencing some sort of construction accounting pain. Typically this pain is the result of a contractor’s business growing, and in the process, outgrowing their original accounting software used to run it. When contractors are experiencing business growth but still relying on basic accounting software such as QuickBooks, they soon find that it isn’t powerful enough to support the complexities of construction accounting. If a client is using QuickBooks, it also means the CPA is performing additional work to clean up the data and organize everything into a useable format. This is an inefficient use of a construction CPAs’ time turning them into a glorified bookkeeper and doesn’t allow for true consultation on how to fully optimize a business. When a client comes to me and is still using basic accounting software, my first recommendation is for them to begin exploring options for construction-specific accounting software such as Deltek + ComputerEase. Construction accounting software from Deltek + ComputerEase allows your company and CPA to focus time and energy on optimizing job profits and growing the business.
This blog series from construction-focused CPAs covers the unique accounting complexities contractors face. Read the first blog in the series, How To Choose The Right CPA For Your Construction Company.
About the Author
With over 23 years of accounting experience, John Stenger is responsible for the overall management of Stenger & Company. He has vast experience and expertise in the area of construction accounting, often being referred to as the “Job Costing Guru.” John has a strong passion for listening to his clients and applying his best effort to meeting their financial needs. He holds his B.S. in Business Administration from Ohio State University. John is a member of the American Institute of Certified Public Accountants and the Ohio Society of Certified Public Accountants.