Accurate financial statements are imperative to the success of your operation. Lenders and bonding companies depend on financial statements when determining the liability, they are willing to take with any operation. Bookkeeping and accounting aren’t necessarily a strength for many contractors, which is why companies employ the help of accounting professionals. Your accountant is responsible for collecting and reporting the data they receive, but errors may still appear in the financial statement if the information reported is incorrect.
Errors in Estimated Job Costs
Estimated job cost is an important factor for a contractor because it can impact their revenue recognition. Poor estimates of actual costs or exclusion of revisions due to change orders result in errors. Comparing actual costs to estimated costs on a monthly basis, ensuring estimated costs include the same elements as actual costs, and considering an increase in pricing and wages will help to eliminate job cost errors.
Improper Job Costs Cutoff
Cutoff errors arise in many types of businesses, including construction. When using the accrual basis of accounting, contractors record revenues and expenses in the period in which they occurred. Receiving invoices after the period results in expenses not being reported in the correct period before closing. Implementing a voucher process that records expenses incurred in the period as liabilities will alleviate this error. The voucher can then be matched with the appropriate invoice when received.
Misreporting of Joint Ventures
When partaking in a joint venture, which is common in construction, assessing the correct accounting method for reporting at the beginning of the venture is vital. Consolidation, equity and cost are all options for reporting. When a direct or indirect “control,” or 50 percent of ownership of the entity is in place, consolidation is required. When a significant influence is in place, approximately 20 percent ownership, the equity method is required. Below a 20 percent ownership, the cost method may be used. Speak with your accounting professional about the appropriate reporting method for your joint venture.
Inaccurate Calculation of Overhead
When allocating indirect costs to a particular job, contractors will use an overhead rate. Rates are often not monitored or verified and can cause an over or under cost allocation. To prevent errors in your overhead rate, monitor the rate annually to evaluate whether appropriate costs are included and if the method is applied correctly.
Failure to Record Appropriate Loss
Many contractors fail to record the appropriate losses in the correct period. Reporting a loss at the time of discovery is a requirement.
Most errors in reporting occur as a result of applying the percentage of completion multiplied by the contract amount, without taking into consideration if there is an estimated loss. Instead, contractors should should monitor estimated job revenue, costs and gross profit or loss for the entire job by period and record losses as they are determined.
By integrating these tips and working closely with your accounting professional, you’re sure to receive accurate financial statements that will assist in the development of your operation.