Success in the construction industry requires the ability to understand accounting and financial statements. It is critical for construction company owners and accounting departments to understand what mistakes may be lurking behind the numbers. The summary outlined below covers the three most common accounting mistakes we see in the construction industry.
Misstatements on percentage-of-completion calculation.
For many construction companies, the percentage-of-completion calculation, or over and under billing calculations, drive the financial statements and thus, the accuracy of a company’s financial statements. Job costs are the most important part of this calculation. Tracking remaining job costs is often difficult because the engineer, on-site job manager and company management may all have different opinions on the progress of a job. Management needs to verify the job costs being shown in the accounting records represent an accurate portrayal of the progress on the job. Keeping accurate and up to date estimates requires communication between all parties involved. Management also needs to verify items such as change orders, open purchase orders, invoices and the estimated length of time needed to complete the job have been accurately reflected in the calculation.
Incorrect allocation of overhead to jobs.
Every construction company needs a reliable method for allocating overhead among jobs.Overhead refers to costs that benefit all jobs, such as: rent; insurance; salaries; office supplies; marketing; and professional fees. An accurate allocation method will lead to a more realistic representation of job costs and profitability. Many construction companies allocate overhead based on labor costs or hours, but in some cases this may not be the most accurate method.
- Some projects may rely more heavily on equipment or materials. In these specific cases, it makes sense to allocate overhead based on one of those costs.
Inaccurate reporting on loss.
As noted above, misstatements on percentage-of-completion calculations are important for management to minimize, however additional considerations are needed if a job is likely to generate a loss. If so, the method requires recognition of loss fully at the time it is determined. Project management should regularly review each project’s costs and should accrue a loss if estimated costs exceed the contract amount.
Smith Schafer is a recognized leader in providing accounting, auditing and consulting services to the construction industry. Our Construction Group, comprised of numerous professionals, is committed to serving over 800 Minnesota construction and real estate entities.
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