The construction industry presents plenty of opportunities for accounting mistakes. Many of these mistakes can be costly.
Here are six of the most common accounting mistakes in the construction industry and why you must avoid them.
1. Completing Undocumented Work
Oftentimes, when a project gets underway, additional work is added or the original plan for the project changes. What was documented at the beginning of the project often ends up not being an accurate representation of the work you actually did.
When these changes happen, it’s essential to follow proper documentation procedures. If you don’t write down the changes and report new pricing negotiations it often results in:
- Less profit
- No profit
- A loss
The solution: Create a stronger process for mid-project changes. In this process, make sure your contractor has time to figure out the new price, document the changes, and send the info to the right person for invoicing.
2. Inaccurate Job Costing
There are a lot of different ways inaccuracies can present themselves in job costing. As you can imagine, mistakes in this area can affect profitability. Let’s take a look at some common job costing mistakes:
A. Not Knowing How Much Things Cost
It’s easy to try to estimate how much a project will cost along with the cost of equipment and labor. While your estimate may be close, even the slightest variation can lead to a loss of profit or cause you to miss out on jobs because of inaccurate bids.
The solution: Turn to your income statement to review expenses. Ensure everything is accounted for and then create a detailed method for calculating costs for each project.
B. Misallocating Costs
Creating an accurate budget for projects can be complex. However, you should be able to account for each cost on every project.
You’ll need to account for variable costs (costs that fluctuate, like in material and labor) and fixed costs (costs that never change, like rent, admin staff, and office expenses). When you factor in both types of costs, you’ll be ensuring you aren’t leaving profit on the table.
The solution: Run through your financial processes and complete a detailed review. Before every project, make sure you are properly allocating your costs. Try allocating a percentage of your fixed overhead to your calculations so that you are taking everything into account.
C. Fixed Costs in Bids
Another common practice for contractors is to include fixed costs in their job contracts. This can be a costly mistake.
The market for materials and other expenses fluctuates quickly and when your costs are fixed in your bids, you could end up losing money.
The solution: Remove fixed cost language from your bids and instead use language that will allow you to adjust the cost based on the market.
3. Cash Flow Mismanagement
Cash flow mismanagement is a mistake in any business model but especially in the construction industry.
In many cases, the business is required to cover the cost of the job until the project is completed. This leads to a negative cash flow for long periods of time. If your business doesn’t have the cash on hand to cover the job costs and other expenses, you won’t be around for very long.
The solution: Ask for deposits on projects or negotiate vendor contracts to reflect an easier payment schedule for your business. This will ensure you have cash on hand to cover expenses.
4. Misunderstanding Joint Ventures
Working with other businesses can be a great way to bring value to your clients. However, they take a great deal of management on the accounting side and if you and the other business are not on the same page, it can lead to errors.
The solution: Be clear on your expectations and how you plan to handle the accounting side of your agreement. Don’t forget to document all activities as well.
5. Accepting Unprofitable Change Orders
Change orders can be great for business, but in some cases, they can be a costly mistake.
Accepting unprofitable change orders is often a result of not fully understanding the scope of work before making changes on a project.
Similarly to mistake #1, this leads to:
- Less profit
- No profit
- A loss
The Solution: Before you start any work, make sure your change order is fully processed and approved. This will ensure profitability for every change order.
6. Not Working with an Experienced Accountant
Costly accounting mistakes are frequently made in the construction industry. In nearly every case, the negative results could’ve been avoided with the proper systems and processes in place.
The Solution: Work with an accountant with experience in the construction industry. They are well-versed in the procedures required to run a successful construction business and can help you put them into place to ensure profitability and success.
They also know the best third-party applications to help your business’s finances run smoothly.
If your construction business is ready to stop making these common accounting mistakes, contact Argento CPA. We will help you automate your processes and use real-time data so you can scale your construction business and avoid costly mistakes!