Construction spending has been rising, with inflation tagging along, and together they add emphasis to the daily construction company priority of avoiding accounting-related mistakes.
Construction spending is up over last year (one would hope, 2020 being what it was). The U.S. Census Bureau, in its Aug. 2 report on monthly construction spending, said, “During the first six months of this year, construction spending amounted to $736.5 billion, 5.4% (±1.0%) above the $698.8 billion for the same period in 2020.”
The National Association of Home Builders is hammering the construction inflation alarm bell. The NAHB cited statistics from the May 2021 NAHB/Wells Fargo Housing Market Index survey, which asked its HMI panel of home builders how costs had changed over the previous 12 months.
From the survey: “The most comment response (checked by 28.0% of builders) was that materials costs increased by 20 to 29.99%. However, 15.9% indicated that costs increased by 30 to 39.99%, 5.9% indicated 40 to 49.99%, and 15.2% even indicated that their costs had increased by 50 % or more.”
There’s never a good time for accounting errors, and now would be even a worse time. Among the often seen, and thus most problematic:
- Mistaking how much money is being made on the project (total net profit after expenses, or margin) with materials costs after markup (the difference between the price of the item or cost of a subcontractor’s services versus the amount charged to the owner by the contractor).
This is an important distinction, because while markup prices are dependent on each item specifically — on some, it’s even possible there will be a loss to the contractor — the margin is how much profit is earned on the total project. Interchangeably using these terms will lead to confusion, lost money, or owner-contractor conflict.
- Failing to keep close track of estimated costs versus actual costs, particularly in an inflationary period. This is a bit of a self-set trap for some contractors. Costs are assessed during job estimation, and the problem arises when those estimated costs are the basis of a contractor’s decision-making as the project moves forward. As costs per item and per service climb, not tracking these costs and adjusting accordingly can put the contractor into a financial death spiral.
- Not fully addressing accounting processes in a joint venture project. Joint ventures can be a very good thing, in that companies together can present a stronger front when seeking a job, and bring different skills to bear. However, what’s sometimes not considered — until the bulldozers are moving — is that the participants’ accounting systems, styles, methods of revenue recognition, and other factors, may be different. The way participants are treated financially also depends on the percentages of interest in the project. These arrangements — with a complete understanding of how they work — must be understood in advance of the project.
- Not ensuring workers’ hours are turned in on the day of the task, not weekly or monthly. People can forget, and then estimate hours worked. It will often be on the high side, adding costs for the contractor and the job owner.
- A failure to document everything, all the time. The fastest way to lose control of a project is to not keep documentary records, from the cost of a tool to putting the finishing touches on the project. This is crucial for taxes, project profit, as a defense if accused of mishandling the job, and many more issues. Lost, incomplete, or sloppy documentation is de facto evidence that the entire job was done improperly.
These five are some of the primary issues for construction contractors during a job; It is by no means an all-inclusive list. On any job, consult with construction accounting professionals experienced in your area of work. The money you save – and make – will be your own.
This article first appeared in KnoxNews.