< Back to Thought Leadership

Top Six Accounting Errors Construction Companies Make

Financial statements are both a tool used to manage a business and a required deliverable for a lender or bonding company.  All construction company owners have to deal with them, and it is crucial for the individuals responsible for the final internal review to know what potential errors could be lurking.

Here are six common errors that can wreak havoc on financial statements prepared using generally accepted accounting principles.

Improper Job Cost and Billing Cutoff:

Most companies utilize the accrual basis of accounting. When using the accrual method, revenues are recorded when earned and costs are recognized when incurred, and billings that differ from revenues earned give rise to over- or under-billings. Cutoff errors arise when costs incurred are omitted during the financial reporting period, or when incorrect billings are utilized in the calculations. Procedures can be implemented to avoid these errors.

Here are several tips that will help you avoid becoming a scam victim.

Generally accepted accounting principles require that a loss on a contract be recognized 100% at the time a loss is determined. Avoid this error by monitoring the detailed job cost schedule.

Inaccurate Application of Overhead to Jobs:

Most contractors use a calculated overhead rate to allocate indirect costs to individual jobs. Indirect costs can include, but are not limited to rent, utilities, depreciation, office salaries, etc. If this rate is not monitored, a significant over- or under-allocation of costs could occur.

Misstatement of Estimated Job Costs:

Errors occur most often due to poor estimating/forecasting, inaccurate actual cost accumulation, or improper treatment of change orders. Since estimated job costs generally drive the calculation of earned revenue for a period, a misstatement can lead to errors in revenue recognition. Monthly comparisons of estimated costs to actual costs and projected costs to complete can help reduce estimating errors.

Improper Treatment of Change Orders:

While change orders are great opportunities, the accounting rules for dealing with them are complex, and improper treatment can cause an overstatement of profit resulting in profit fade as the job progresses. Implementing procedures for recognizing approved change orders can reduce the risk of errors.

Improper Treatment of Joint Ventures:

Joint ventures can be great opportunities; however, accounting for them is often misunderstood. Due to varying methods that are acceptable for recording joint venture activity, it is important to evaluate the methodology and alternatives at the beginning of the activity.

Ready to implement processes to help reduce the risk of errors like these? Give us a call.

 

Read More Thought Leadership Articles Like what you read? Subscribe to our newsletter. Click Here.

 

Employer Tax Credits for Providing Paid Sick and Family Leave Related to COVID-19

The American Rescue Plan Act, enacted March 11, 2021, aims to deliver economic relief to families and workers. On April 21, President Biden announced a provision of the American Rescue Plan Act that allows eligible employers to claim refundable tax credits for providing emergency paid sick leave to employees who take time off for reasons […]

Learn More
Charity Reimbursement

Charity Reimbursement: Protecting it from Audit Scrutiny

There is a new audit trend coming down the pipeline that could impact your charity reimbursement for Medicare bad debt. In the past there was no enforcement of statements being sent to a charity patient before they were deemed indigent. Until a patient has been approved for charity, they are still deemed non-indigent. Auditors are […]

Learn More

HIPAA and Covered Entities

Anyone who works in the healthcare industry knows that their organization takes steps to protect patient health information under a series of guidelines known as HIPAA. There are several provisions to HIPAA that require organizations to use Federal guidelines to ensure digital health information is secure. Those provisions include: Privacy Rule Security Rule Enforcement Rule […]

Learn More