A construction company should always function like a well-maintained machine when it comes to handling their business effectively. Just like a machine, if something is amiss, it will fall apart in the end. Maintaining your finances is important in running a business, even from an accounting standpoint. It’s mostly due to the fact that some aspects of accounting are easy to miss or neglect to ensure that even the smallest details are in working order. Some of these mistakes can prove costly and could lead to even more problems than intended if they weren’t routed properly. In this article, we’ll discuss 5 construction accounting mistakes that a company should avoid if they want to maintain a proper business structure and future success.
1. Job Cost Cutoff Errors
This mistake is the result of receiving invoices later than intended, which are then neglected during the closing process of managing the costs to all payable accounts. This error is not limited to construction companies. These mistakes could jeopardize the balance of gains and losses since there is a shortage of financial information from omitting certain costs during a certain period. To avoid any errors involving job costs, implement a voucher process that records the costs incurred as liabilities that need to be recorded
2. Failure to Record Losses
In business, everything should be recorded to better calculate and allocate money where it needs to go. It is tempting to maintain a positive outlook by only recording gains, but discrepancies could ultimately lead to greater losses as a result. The error occurs as a result of applying a certain percentage of completion that is multiplied by a contract’s amount, then neglecting to consider whether the job is estimated to be a gain or loss. Avoiding this pitfall requires monitoring schedules that contain information including the job’s estimated total revenue, cost and loss.
3. Unable to Recognize Joint Venture Activities
As common as joint ventures are in sharing business relations among two or more companies, there are some misconceptions that can lead to a costly fit of confusion. In order for a proper joint venture to function financially, all actions must be critically assessed at the beginning of any activity. The host company can choose methods that they must record whenever they are participating in such a relationship, which include consolidation, equity and cost methods.
4. Misrepresenting Estimated Job Costs
Certain contractors keep track of estimated job costs through calculating a percentage-of-completion method for revenue recognition. The problems that usually affect the estimated job cost is caused by underestimating factors that can influence the accurate cost accumulation or the exclusions of revisions to revenue recognition. To ensure none of these problems surface and to successfully prevent errors such as this, both the actual cost and estimated costs should be compared and compiled on a monthly basis. This way, a construction company can make sure that their estimated costs included similar elements to the actual data, decide on increasing prices and wages and constantly update the information on a monthly cycle.
5. Not Seeking Professional Help
Making decisions head first without consulting a specialized accounting professional can be a bad move for many construction contractors. If you want to get the best advice and service to improve your accounting, consider consulting with RMG Accountants and Consultants. RMG provides a wide range of accounting services that can help you manage your finances and provide the services needed to fiscally assess your financial standing. Best of all, RMG is very flexible with our clients. We cover various industries with construction as a prime example. Please feel free to contact us for more information and financial consulting assistance in New Jersey today!