Building Better Books: Top Accounting Pitfalls in Construction Projects
Accounting in the construction industry can be inherently challenging for a number of reasons. Not only can construction projects (and costs) change, but material costs can also fluctuate. Unfortunately, when accounting practices fail to take these kinds of issues into consideration, the performance of the company could be at risk.
So, what are some of the most common accounting mistakes when it comes to construction work-in-progress accounting? With a better understanding of these mistakes and how to avoid them, you can take proactive steps to improve your business accounting practices and get a more accurate picture of your company’s finances.
1. Overlooking Contracts
One of the most common mistakes made when it comes to construction WIP accounting is simply failing to include all contracts on the schedule. This should include not only open projects, but ones that have been recently closed as well.
By getting into the habit of including all projects (big and small, open and closed) on the accounting schedule, you can avoid making mistakes that could affect the accuracy of your business accounting. Tracking every single contract can also make it possible to perform a more accurate gain/loss fade analysis, which can help you get a better idea of your company’s overall financial picture.
2. Failing to Update When Projects Change
When you work in construction, you know all too well just how quickly projects can change. A project that starts off relatively small in scope can quickly grow, as can the costs associated with the project. When change orders do occur, it’s important to update the accounting schedule promptly. This remains true even if the contract is awaiting an updated price agreement. So long as the change has been agreed upon in a way that is legally enforceable, change orders should be included on the accounting schedule right away.
3. Inaccurate Costs, Values and Other Inputs
One of the biggest challenges construction teams run into on jobs is keeping the WIP schedule completely accurate. Because these schedules rely on four different inputs that can be difficult to calculate, even the slightest of miscalculations could affect reporting. This is why it’s so important for teams to take their time calculating such critical inputs as projected total cost, job-to-date billings, job-to-date cost and total contract value.
4. Failing to Reconcile with Financial Statements
Remember that your WIP schedule should be reconciled with other financial reports to ensure accuracy. All too often, this is a step of the WIP accounting process that is overlooked. Specifically, your team should be taking the time to reconcile WIP schedules with internal financial statements, income statement accounts, contract liabilities and contract assets to paint the most accurate picture possible.
5. Overstating Costs and Revenues
Last but not least, take care to ensure that your estimated costs match the scope of the contract and reflect the total actual costs for your business. This is an especially common issue in construction accounting because projected costs don’t always match final costs when a project is completed. As a result, your business could end up with overstated billings, understated contract revenues or other inaccuracies that fail to give you the full picture of your company’s financial performance.
To avoid this error, be sure that total estimated costs are updated to reflect final actual costs when a project is said and done. Taking the time to include updated change orders in your WIP accounting schedules can also help to ensure that your accounting team is always working off of the most accurate and up-to-date information possible.
How to Keep Your Ducks in a Row
Keeping your construction company’s accounting in order can be challenging, especially when it comes to dealing with projects that are in-progress. Fortunately, avoiding many of these common mistakes is relatively simple. From there, following some other best accounting practices can help you keep your business accounting on-track—such as using the right accounting software and even selecting the correct accounting method for your company’s needs.
If you’re in need of additional guidance when it comes to managing your construction company’s accounting and financial needs, consider contacting us, or, meeting one-on-one with a business financial advisor or accountant. In doing so, you can get the personalized advice and guidance you need to get your accounting practices in order and move forward with confidence.
Contributing author: Kaitlyn H. Axenfeld, CPA/CFF, CFE, has extensive experience providing audit, review, compilation and advisory services to a wide variety of clients with a focus on the construction, architecture/engineering and manufacturing industries. Kaitlyn specializes in forensic accounting and consulting services, including litigation support to law firms and privately held companies in fraud detection, damage calculations and prevention matters. If you have any questions or need any assistance, please contact Kaitlyn at kaxenfeld@dmcpas.com.