Construction Accounting 101: Investigating the Unique Accounting Demands Within the Industry

The following content is sponsored by Aktion Associates. 

Accountants are often detail oriented and diligent people just by nature. It’s what makes them so valuable to a company operation. But bookkeeping for a construction company requires another level of detail and diligence due to the unique and specialized industry itself. Between job costing to change orders to work in progress (WIP) tracking, taking on the books for a construction company could easily become overwhelming. To top that thought off, it’s easy to make mistakes and mismanage funds when handling a number of complex construction jobs with construction crews and construction equipment, which can be difficult to project accurate dates of completion to boot.

But there’s no need to throw up your hands in hopelessness! We’ve compiled a handy list of common construction accounting mistakes to avoid and general best practices to follow.

Get definition: Job costing for projects

Today’s construction site is filled with things that cost money. It might be tempting to try and tally all those job costs and expenses once the project is complete, but it’s only going to open you up for error and hassle – and time, lots and lots of time spent.

Labor, equipment and supplies all need to be planned for and accurately tracked. But we’re just talking about one job site here. Most construction companies work on multiple projects at the same time.

When a construction company does their job costing the most efficient way, people record expenses daily. Each job needs to have the costs attributed correctly in real-time. Giving crews the ability to clock in and out remotely and also record tools and equipment used can help the accounting team back at the office enormously. This ability means the office has a bird’s eye view into what’s happening on each job site each day so there are fewer surprises.

There are many excellent cloud-based construction-specific tools that help companies see their job costs more clearly. When that kind of visibility exists, your jobs are much more likely to be completed on time and on budget.  

Be flexible: Change orders in construction

What would the world be without change? Of course, along with complex construction jobs comes many changes and adjustments along the way. Change orders can negatively affect your profits if they’re not handled appropriately. Without a formal change order approval process, or at least a way to record them in an accounting system, you’re opening yourself up to customer contract disputes too.

The idea is to prepare the customer for the likelihood of changes happening on their project. But that verbiage isn’t just for the customer. Contractors incurring costs that may not be approved by the customer can be a risky prospect. With the right construction technology in place, both contractors and the accounting team see change order approvals come in. Then the additional costs associated with that change order are attributable to the correct job and the total contract amount is increased as well. Just another way technology can give everyone from accounting to contractor to customer a clear picture of the costs associated with each job.

Active project tracking: Work in progress reports (WIP)

Any seasoned construction accountant can tell you how crucial their WIP reports are to them. The overall goal of a WIP is to report on whether the project and tell whether the company as a whole is cash positive or cash negative. But it’s actually way more complicated than that.

When the WIP is done on time and done right, it’s another great snapshot into the health of the company’s financials. You should be able to see all the above job costing and change order information in addition to other project-to-date financials that let you know if a job could go over budget.

As discussed above, timely recording of financials is the key to construction accounting success for many reasons. Getting behind on costs and revenues can be a dangerous gamble. Your WIP report can help you know the amount billed and amount completed on a job.

Perhaps even more important, project stakeholders will be looking at those reports to determine whether their vested interest is in good hands. The WIP report is the most reliable way to keep tabs on a company’s financial performance.

Because accountants and business leaders rely so heavily on WIP reports, here’s a quick rundown on why they’re so important.

  • Under-billing: Allocated resources are all used up and the work is completed, but payment is still coming in. This can lead to financial statements with inflated revenue and possibly higher taxes in the end.
  • Over-billing: The customer is financing the project in this scenario. Work is behind the billing schedule, and this can turn into cash flow issues at the end or after the project is complete.

But unfortunately, many contractors use complicated spreadsheets for creating WIP reports. Here are common problems construction accounting departments encounter with a manual WIP report:

  • Double data entry coming in from separate departments
  • Data entry errors or different naming conventions for the same company
  • Lost or forgotten documentation

But the good news is that you can eliminate the human error factor. Get information from the field to the office in real-time and avoid financial reporting mistakes. Dynamic and current data lets the accounting team quickly report on the health of the project. A connected, cloud-based solution should be able to gather, store and share this information automatically.

In summary, job costing, change orders and WIP reports are 3 construction-specific areas that can be landmines for accountants. If you’re worried at all about the dangers of human error in your construction projects, it’s a perfect time to look at a comprehensive, cloud solution that connects all your departments and reports in real-time from the field. There are some excellent choices today for modernizing your construction operations. If you’re not sure where to start, here’s a helpful guide to point you in the right direction. Most growth-oriented contractors are looking for the ability to seamlessly report status back to accounting, but they also want flexibility and choices for deployment. So as you consider your needs and wants for a new system, you may find a construction evaluation checklist a helpful tool. Discover how you can instill systematic diligence in your construction accounting team and company-wide with the help of one connected system that automates your more cumbersome processes.