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5 Common Accounting Mistakes Construction Owners Make (And How to Avoid Them)

We all make mistakes.

However, some can be more costly than others. Accidentally putting the milk in the cereal cupboard during early morning breakfast, now that’s a harmless mistake.

But accidentally making a critical mistake on your construction companies accounting…that can be a problem.

To help you stay on top of your accounting, here are five common accounting mistakes construction owners make, as well as tips for avoiding them.

Being Disorganized

Especially early on during a construction company’s lifetime, a little disorganization can be expected — especially when it comes to accounting. The breadth of the accounting needs for construction companies can be overwhelming, in particular for small to mid-sized companies.

In order to avoid this mistake, it’s important to make sure you have all your ducks in a row prior to starting your business.

This means you should absolutely work with an experienced accounting professional. Having someone like that on your team, or teaming up with a third-party accountant, is a surefire way to make sure that you stay organized with all your accounting needs from the get-go.

Misstatement of Estimated Job Costs

Most contractors will typically use the ‘percentage-of-completion’ when it comes to reconciling revenue, estimated job costs are the most important factor. When errors do arise, it is caused by poor estimating and forecasting, inaccurate actual costs accumulation, and accidentally excluding revisions due to change order.

In order to avoid this mistake, make sure you’re comparing actual costs to estimated costs regularly — a month to month basis is usually recommended. In addition, make sure that estimated costs include the same elements as actual costs.

As previously mentioned, working with accounting professionals is the best and safest way to ensure that you remain error-free when it comes to your finances and accounting.

Inaccurate Application of Overhead to Jobs

Many contractors use an overhead rate to make sure that their allocating indirect costs to individual jobs. They’ll take a percentage multiplied by one of the two direct labor costs or materials costs.

Although, there are some variables that are not being accounted for including direct labor hours.

Therefore, when the rate used is not being looked at carefully to determine if it is an accurate representation of the current overhead costs, you’ll run into both over and under-allocations of costs.

To prevent this error, revisit the rate annually to assess that the correct costs are being included and the most appropriate method is being applied. Assessing which method is most appropriate for a contractor should be based on the most critical component of the construction activity, labor or materials.

Not Addressing Unreasonable Contract Requirements

While this isn’t necessarily an accounting error, not speaking up when a contract is unreasonable can be extremely costly in terms of your finances down the road.

Before you begin a job, make sure that you’re taking the time necessary to evaluate contract terms. That way, you can look for unreasonable terms that may lead to contract disputes later on during the course of the project.

Overall, be assertive. You are the expert after all and the client should trust your judgment when you mentioned a clause or section that is simply not doable.

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