February 14, 2017

Optimize Your Construction Accounting Practices

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Accounting – it’s a part of the construction business that most don’t think about regularly until a billing, payment or other issue arises. Although it can be a secondary consideration to new sales, customer management or labor acquisition, it’s an essential process that provides critical management data. Financial performance, project profitability, cost control and cash flow management reports all originate from accounting. While essential for all companies, it’s especially imperative for construction companies to have robust accounting practices in place because of the nature of the industry. Multiple jobs with various labor requirements, equipment and materials all present unique accounting challenges. To help clients, prospects and others optimize accounting practices, Wilson Lewis has provided a few tips below.

Essential Construction Accounting Practices

• Job Costing – This is an essential accounting practice that all construction companies and contractors need to have in place and review regularly. Unlike other industries that offer products with a constant production cost, sales price and profit margin, construction companies operate very differently. One construction company could be working on three very different projects that require different levels of labor, materials and equipment. This means that without proper tracking not only is estimating difficult but so is profit management. As a result, proper job costing ensures that expenses are correctly assigned to projects and profit margins are managed appropriately. Without effective job costing practices, management would not be able to accurately track expenses, manage cash flow or achieve profit goals.
• Change Order Management – Another best practice for construction companies is to have a process for tracking change orders. Since changes to the original project are common in the industry it’s essential to have a method for tracking the expenses related to the change. Expenses need to be properly documented and presented to the client in an additional invoice. Such expenses include labor, material and even additional equipment. Many struggle with change orders due to lack of communication with their customers. As such, it’s important to clearly communicate all changes, why the change was implemented and what the corresponding costs are. A clear process for tracking change orders ensures there are no unexpected surprises when the project is completed (for you and the customer).
• Effective Internal Controls – Implementing an effective series of internal controls is a best practice that companies in all industries should follow. Without a proper series of safeguards a company exposes itself to lose money from schemes and scams perpetrated by employees, vendors and others. Key areas where controls should be implemented include; cash management, accounts receivable, accounts payable and payroll processing. These are the core areas where the largest opportunity for fraud exists and where internal controls can most effectively deter dishonest behavior. It’s much easier and less expensive to proactively manage this risk, then find out considerable sums of money were stolen from the company.

Contact Us

An effective accounting process will ensure that any construction company is ready for the financial management and reporting challenges common to industry companies. If you have questions about optimizing your accounting practices or need assistance with other tax planning or compliance, Wilson Lewis can help. For additional information call us at 770-476-1004, or click here to contact us. We look forward to speaking with you soon.