The construction industry is a growing industry, and its growth depends on its project efficiency and the time it takes to complete the project. In order to thrive in the industry, the organization strives to pursue safety, execution speed, and attention to detail, while keeping the project profitable. Run a construction company and want to avoid common accounting mistakes made by construction companies? In most cases, bookkeeping will go backward. Accidentally making a serious mistake in the accounting of the construction company may be a problem. These are the six common financial mistakes we have seen faced by construction companies.
1. Inaccurate Application Of Overhead To Jobs
Most contractors use overhead rates to allocate indirect costs (such as rent, utilities, depreciation, etc.) to individual jobs, and their percentage is multiplied by direct labor costs or material costs, although there are differences, such as direct labor hours or labor 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.
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, and 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.
3. Inaccuracies In The Initial Estimation Of The Job
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 financial 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. You should have detailed knowledge of the status of the job and consistently update the budget against costs throughout the project, to avoid making this error.
7. Not Seeking Professional Help
Making decisions without consulting professional accounting professionals is a bad move for many construction contractors. An experienced bookkeeper can get you organized and tax-ready, ensuring your records are accurate and compliant, every month of the year. If you have any queries relating to accounting for construction, feel free to contact us at Irvine Bookkeeping.
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