Nine Most Common Construction Accounting Mistakes
Construction accounting is complex and mistakes are inevitable. That’s because construction has unique accounting requirements, processes, documents and procedures such as AIA billing, change orders, submittals and RFIs. In addition, a contractor’s payroll can become complicated when work extends to multiple states, requires prevailing wages, or involves unions.
So how can contractors improve construction accounting? One way is to be able to identify and avoid the most common mistakes frequently made by contractors. Through decades of servicing the construction industry, the nine most common accounting mistakes we’ve seen construction companies make are:
1. Not tracking committed costs daily. Costs already committed for subcontractors and materials should be tracked in real-time to maintain control over a job and keep it profitable.
2. Confusing margin with markup. Markup is the difference between the cost of materials or services and the price charged. Margin is the gross profit on a job and is a percentage of the sales price.
3. Confusing percent spent with percent complete. If you’ve spent half your budget that does not necessarily mean you have done half the work. You may have done only 40% of the work, or maybe 60% of the work.
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4. Not running frequent WIP reports. With frequent WIP reports, you can manage work and profit proactively using actual job data as opposed to being reactive to problems that arise. This helps you stay ahead of the game and optimize profits for every job.
5. Not making WIP adjustments in the P&L Statement. WIP reports identify underbilling and overbilling amounts. The accounting staff must enter these amounts on the P&L Statement and Balance Sheet to get an accurate financial picture.
6. Not tracking how much equipment, tools and other assets are costing. At the end of each day, a contractor needs to allocate the cost of each asset used on a job (e.g., the cost of owning, operating and maintaining that asset).
7. Not tracking unposted payroll. Standard accounting software lacks the ability to track unposted payroll. However, monitoring these costs in real time allows you to manage costs proactively by seeing the effect of employee hours on the budget without actually processing payroll.
8. Delayed tracking of labor hours. “You want workers to turn in their time at the end of each day, not the next day, not a week later,” Meibers said. “Tracking things as they happen with remote field-to-office tools makes them more accurate.”
9. Confusing overbillings with profit. If you overbill by $10,000, that is not a cash profit that you can spend. That amount should be recognized as payment for work that has not yet been completed.
To learn more about how Deltek + ComputerEase helps contractors power job success and master construction accounting, contact one of our team members today.
About the Author
John is the Vice President and General Manager of Deltek + ComputerEase, the leading provider of accounting, project management and field-to-office software for the construction industry. In today’s rapidly changing and fast paced world, a big part of John’s role is to ensure that ComputerEase equips clients with the most cutting-edge technology. Prior to joining ComputerEase 22 years ago, John spent a decade working for a large mechanical contractor.