While preparing the financial statements for construction companies many errors creep in unless great care is taken to avoid them. Below, we throw light on this topic by briefly pointing to the top five accounting errors made by the inexperienced in the accounts for construction companies. We hope the suggestions for solutions helps to ensure that you avoid making any of these mistakes.
Incorrect allocation of overheads to jobs
Allocating indirect costs to jobs using an overhead rate is a common practice among inexperienced contractor-accounts personnel. The problem arises, here, when the overhead rate employed is incorrect and does not provide the exact depiction of the current overhead costs of the company. This can lead to an over- or under-allocation of costs.
To avoid making this error, you should monitor the rate annually to ensure that the overhead rates are accurate and that the most suitable method of computation is employed.
Incorrect cut-offs in job costs
While using the accrual basis of accounting, you might end up using an incorrect cut-off if the costs incurred during the reporting period are omitted. When you receive invoices after the period, which is not considered as a part of closing section in accounts payable, you are committing this mistake.
To avoid making this error, you should record the costs in the exact period in which they were incurred. You can use a voucher system of costs incurred to record these costs.
Lack of clarity in estimating loss
A large proportion of contractors use the percentage of completion method for revenue recognition. In such a case, when you multiply the percentage of completion by the contract amount without looking into the status of the job ‒ without working out whether it made a loss or not ‒ you will be committing this error.
To avoid making this error, you should have detailed knowledge of the status of the job and consistently update budget against costs throughout the project.
The dilemma of joint-venture projects
Construction Accounting for joint-venture activities can be quite tricky. Among all the different methods available for recording a joint venture, it is crucial to select and evaluate the correct one and to use the right accounting method right from the start of the project.
To make sure you avoid errors, assess the various methods available, including consolidation, equity, and cost methods, and choose the regime that is most suitable for the firm.
Errors due to inaccuracies in the initial estimation of the job
Errors of this sort are also a result of using the percentage of completion method for revenue recognition. These errors occur due to incorrect estimations, exclusion of revisions and incorrect actual cost accumulation.
To make sure you avoid this error, you should regularly perform comparisons of the actual and estimated costs. Do not forget to revise the estimates according to changes in prices and regulations.
The real solution to avoiding errors in construction accounting
Preparing the financial statements for construction companies is a job for a professional accounting practice experienced in managing the financial health of construction companies. We hope this short list helps insure you against committing errors; better still, that it will have tempted you to explore more about hiring an expert in construction accounting.