As small business entrepreneurs, owners of construction companies face the same accounting challenges other small business owners face, such as forgetting to bill clients, failing to add sales taxes to invoices, making math errors and not using accounting software to its full potential. In addition to those issues, however, construction professionals face other hurdles unique to their industry.
Inaccurate Job Estimations
Inaccurate job estimations can turn a contract into a loss before you’ve even gotten started. To ensure your estimate is as accurate as possible, start with a broad overview of the project, break it down into sections, and then estimate line items one by one. Don’t put more detail into one section than another, as that may leave your estimate short. Also, make sure not to underestimate labour costs; be realistic about which tasks you can complete with your regular crew and when you may need to hire consultants at higher rates.
To cultivate accurate estimates, compare past estimates to actual costs. Note where errors were made, and identify where you need to raise prices for future estimates. Look into construction industry accounting software that includes templates for cost estimations.
Incorrect Overhead Allocation Rates
Also called to as the burden rate, the overhead allocation rate allows you to calculate how much to add to each contract to cover indirect expenses, such as rent, utilities, administrative costs, equipment depreciation, repairs and other costs not directly related to the project. To create an indirect rate, calculate the total amount of indirect costs over a set time period, look at costs for labour or materials over the same time period, and divide the two sums.
To illustrate, imagine you plan to base your indirect cost rate on labour. During the last quarter, your indirect costs were $100,000 and your labour costs were $500,000. In this case, your overhead allocation rate is 20 percent (indirect costs/labour costs). When writing estimates, use this rate to determine how much to add to each estimate for indirect costs. To ensure the rate closely reflects your expenses, recalculate it annually and adjust as needed based on changes to your upcoming budget.
Delays in Recording Losses
Under generally accepted accounting principles, if you anticipate a contract is going to be a loss, your accounting records should reflect that fact immediately. This issue confuses many construction company owners; in most cases, when recording revenue, you record it slowly as it is received, however, losses are different.
To illustrate, imagine you are going to receive $1 million for a job, You have completed half the work, your costs to date are $600,000, and you anticipate incurring an additional $600,000 to bring the job to completion. In this case, you don’t need to wait until the end of the job to claim a loss. Rather, you should record the estimated loss of $200,000 on the books right away.