Construction Business Owners: Avoid These Two Common Accounting Problems

For construction companies, accounting is more complex than just balancing the books each month. Contractors often manage multiple projects at various stages of completion while ideally having more projects lined up. Your accounting practices need to be agile, multifaceted, and comprehensive.

Unfortunately, from underperforming budgets to overlooked expenses, contractors frequently face financial reporting challenges. Let’s explore two major accounting problems that are common in many construction businesses.

Lack of Organization

One of the primary causes of accounting struggles is a lack of organization. With each project involving different moving parts, tracking expenses, invoices, and receipts can become overwhelming. Without formalized accounting practices for gathering and organizing information, critical data and important documents can be misplaced, overlooked, or difficult to locate. Ultimately, this can lead to faulty financial reporting and unnecessary delays in collecting payments for completed work.

If you’re still using a generic accounting program or a mix of paper processes and spreadsheets, it may be doing more harm than good. Investing in construction-specific accounting software can help clarify and streamline essential processes.

These software solutions automate tasks and create digital workflows and filing systems. They typically feature expense tracking, invoice management, and budget forecasting, allowing staff to maintain clear and organized records of financial transactions. Plus, today’s cloud-based mobile tools make it easy for authorized team members to input and access financial information and store documents whenever and wherever necessary.

Outdated or Lax Processes

Failing to reconcile accounts, neglecting to track expenses in real time, or relying on manual data entry can introduce errors and discrepancies into your accounting process. Outdated or overlooked procedures not only undermine the credibility of your financial statements but also expose your business to compliance issues and legal risks.

If you haven’t already, establish standardized accounting processes supported by clear procedures to ensure consistency. Even if you have established them, it’s essential to continually improve your accounting processes and procedures as errors are identified, technology advances, and your business grows. Best practices include:

- Conducting regular reconciliations of financial accounts
- Implementing real-time expense tracking systems
- Using standard forms
- Automating manual and repetitive tasks wherever possible

Ensure that you have established robust accounting processes for project managers as well. For instance, they should compare actual labor hours and materials costs against each job's budget to assess progress and make necessary adjustments.

Before projects even begin, there are key accounting concerns to address. Accurate estimates are crucial for your construction business’s financial health and should be as detailed as possible, itemizing all expected costs associated with the job. This includes labor, equipment, tools, materials, as well as overhead and indirect costs, which can be more challenging to identify and quantify.

A good practice for both accounting and estimating is to use an approach called “job costing,” which involves assigning a code and dollar amount to every project-related task or activity. Job costing can also aid strategic planning, revealing over time which types of jobs are profitable and which are not.

Review and Improve

Many construction businesses developed their accounting processes years or even decades ago. As time passes, inconsistencies and redundancies can develop. Contact our firm for assistance in reviewing and improving your processes and procedures.