The construction industry can make accounting inherently challenging for a number of reasons. Not only can construction projects and the costs involved change, but material costs can also fluctuate. When accounting practices fail to take these kinds of issues into consideration, the performance of the company could be at risk.

With a better understanding of these mistakes and how to avoid them, you can take proactive steps to improve your business accounting practices and build a better book regarding your company’s finances. Here are five of the most common mistakes construction companies make when handling accounting practices:

1. Overlooking Contracts

One of the most frequent mistakes made in construction work in progress (WIP) accounting is overlooking contracts on the schedule. This includes not only active jobs but also projects that have recently been closed.

Building the habit of including all projects – whether they’re big, small, open, or closed – on the accounting schedule, you can avoid making mistakes that could affect the accuracy of your business accounting. Consistently tracking all contracts also enables a more accurate gain/loss fade analysis, which can help give you a clearer understanding of your company’s overall financial picture.

2. Failing to Update When Projects Change

When you work in construction, you know 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 occur, it’s important to update the accounting schedule promptly. A change order is the formal amendment correlating to the project’s contract that modifies the scope, schedule, and costs of the original project. This remains true even if the contract awaits an updated price agreement. If 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 is keeping the WIP schedule completely accurate. Because these schedules rely on four different inputs (total contract value (including change orders), estimated total costs to complete the project, costs to date (actual costs incurred), and total billings to date) that can be difficult to calculate, even the slightest miscalculation can 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 in the WIP accounting process that is overlooked. To prevent this, 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. By updating the WIP schedule monthly to include all change orders and revisions in cost, your team will be able to properly reconcile. 

5. Overstating Costs and Revenues

It is important 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 the total estimated costs are updated to reflect the 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 from the most accurate and up-to-date information possible.

Corrigan Krause Can Help

Consistently updating WIP information can be difficult, especially when projects are ever changing. Corrigan Krause can help effectively review and reconcile your financial statements to ensure that your business’s performance isn’t affected by sudden or natural project changes. If you have any questions or would like additional information, click here to learn more about becoming a client.