8 Most Common Construction Accounting Mistakes That Cause Catastrophic

Updated: Sep 21

In a tumultuous industry like construction, you’re probably familiar with the term “crunch the number since it’s all too easy to let crisp, timely financials go soggy with outdated data and cause unfortunate mistakes.

To help set you up for success, I've uncovered the most common construction accounting mistakes frequently made by contractors.

  1. Inaccurate Application of Overhead to Jobs

  2. Incorrect Cut-Offs In Job Costs And Billing

  3. Inaccuracies In Job Cost Estimates

  4. Misunderstanding Costs

  5. Fixed Material Costs

  6. Failure to Record Loss

  7. Incorrect Recognition of Joint Venture Activity

  8. Not Ask Professionals For Help

accounting-mistakes-construction

By applying all learnings in this guide to your current bookkeeping process, you can avoid catastrophic errors.

1. Inaccurate Application Of Overhead To Jobs

Construction companies typically must account for high overhead costs in their accounting and most contractors use an overhead rate to allocate indirect costs to individual costs. They’ll use a percentage multiplied by either labor costs or material costs.

Problems arise when the overhead rate employed is incorrect and does not provide an accurate description of the company's current overhead costs. This may result in excessive or insufficient cost allocation.

To prevent this accounting error, review the rate annually to assess that the correct costs are being included and the most appropriate method is applied. Determining which method is most appropriate for a contractor should be based on the most crucial component of the construction activities, labor, or materials.


2. Incorrect Cut-Offs In Job Costs And Billing

Most companies utilize the accrual basis of accounting. When the accrual system is used, revenue is recorded at the time of being earned, the cost is recognized when incurred, and bills that are different from the revenue earned will result in excessive or insufficient invoices. Cut-off errors occur even in non-construction companies and are due to the omission of costs incurred during the reporting period. Usually, this is caused by not receiving an invoice in the A/P invoice as part of the checkout process after the end of the period

To avoid these construction accounting mistakes, you should implement a process in which a voucher system of costs incurred records these as liabilities in the period incurred.

>> More: Construction Billing Methods: Never Waiting on Unpaid Billing With This Procedure


construction bookkeeping service

3. Inaccurate Job Cost Estimates

Because most contractors use the percentage of completion method for revenue recognition, the most important factor is the estimated job costs. Incorrect estimates are usually caused by poor estimates/forecasts, incorrect accumulation of actual costs, or incorrect revisions due to change orders.

In order to avoid estimation errors, contractors should compare the actual cost with the estimated cost every month, ensure that the estimated cost includes the same elements as the actual cost, consider increasing prices and wages in the future, and revise the estimate accordingly every month. Do not forget to revise the estimates according to changes in prices and regulations.


4. Misunderstanding Costs

One of the most common and biggest accounting mistakes in the construction industry is not having a clear understanding of costs. A construction company should fully understand the details of the cost. This includes not only materials and labor but also equipment and administrative costs. Without this understanding, the pricing of the project may be incorrect, and eventually, the work is doomed to lose money.


5. Fixed Material Cost in Bid Contracts

Some contractors have built-in their contracts the ability to adjust material prices based on market fluctuations, while others have not. For example, when steel prices rose a few years ago, some companies saw the increase in material costs almost overnight, and many companies had to bear the costs because they could not pass the costs on to customers through contracts.


6. Failure to Record Losses

Construction companies that use the "percentage-of-completion" method sometimes fail to consider whether a job is likely to generate a loss. Generally accepted accounting principles require that a loss contract be fully recognized at the time a loss is determined.

To successfully prevent this accounting mistake, you should have detailed knowledge of the status of the job and consistently update the budget against costs throughout the project. Frequently review each project’s job cost schedule, be prepared to accrue a loss in case the estimated cost exceeds the contract amount.

>> More: How to Improve Your Construction Company’s Profitability


6. Incorrect Recognition of Joint Venture Activity

Joint ventures