Regardless of what industry you’re in, accounting is one of those crucial functions that demands thoroughness and attention to detail. Accounting for a construction firm is even more complicated and time-consuming. As a result, the construction industry is frequently confronted with a variety of financial challenges.

Construction company owners, often struggle with their finances and are usually unaware of their actual financial situation. It is common for these contractors to learn of their financial situation only after completing a project. Therefore, it is imperative for Construction Companies to be prepared and made aware to understand what mistakes they may encounter with the review of their books and accounts. Bearing in mind that accumulating errors can lead to a company’s demise.

To help avoid costly construction accounting mistakes, here’s a look at some of the common construction mistakes contractors make and how to prevent them.

COMMON ACCOUNTING MISTAKES IN THE CONSTRUCTION INDUSTRY

1. Incorrect Allocation of Overhead to Jobs

A common mistake that occurs is inexperienced contractor-accounts personnel frequently allocating indirect costs to jobs using an overhead rate. The problem emerges when the overhead rate used is incorrect and does not accurately depict the company’s current overhead costs. This will lead to both over-and-under allocations of expenses. To solve this error contractors should monitor the rate annually to ensure that the overhead rates are correct and that the most appropriate computation method is used.

2. Incorrect Cutoffs in Job Costs

Another common mistake that plagues many construction companies comes by way of the use of accrual basis of accounting. What this means is that they record revenues when they are earned as well as expenses incurred. There is a cutoff error which is caused by deleting costs incurred during the reporting period. Also, it occurs from receiving invoices after the period that are not picked up as part of the accounts payable closing process. A way to solve this issue is to keep records of all expenses in the order in which they were incurred. If the contractors record these charges they can then utilize a voucher system of costs incurred.

3. Changes that are Mismanaged

Mismanaged changes are a reality that all construction companies face. This is when changes are made to the original plan. Change orders can increase income for your firm, but they can also introduce new problems that might put a massive dent in your margins. What may have been a well-thought-out plan based on detailed task pricing becomes an improvised plan, resulting in oversight and inaccurate accounting. A solution to this mistake is to implement a strategy that allows the time and resources to manage change orders intelligently and adequately. Construction owners must be prepared for everything that comes their way.

4. Inaccuracy of Estimates.

Estimating is one of the most challenging positions in the construction industry. It is also one of the most crucial. Estimating errors occur due to inaccurate estimations, the omission of revisions, and the accumulation of incorrect actual costs. The chances are that one wrong estimate on a losing project will not know you out of business, however, string together a couple of unprofitable projects, and you might find yourself permanently closing your doors. A way to solve this issue is by avoiding estimating errors. The way to do that is to compare actual costs to estimated costs on a monthly basis. Also, verify the estimated costs which include the same elements as basic costs, consider possible price, and wage increases, and modify estimates accordingly on a monthly basis

MISTAKES CAN BE AVOIDED, HWAA CAN HELP YOU!

Let HWA Alliance of CPA firms (HWAA) mitigate and help you avoid these mistakes that plague most construction companies. Management of a company’s finances only takes a few dedicated hours if you have an experienced accounting firm that has ceaseless innovation and incomparable accuracy and attention to detail.

HWAA, a big firm dedicated to your success. Click here for more information on our services – and get in touch with us today to get started on keeping your finances up to current and proper!