Construction Project Accounting: Must-Dos To Avoid Uh-Ohs

A certainty about construction projects is that there’s certainly a long list of must-do tasks.

Construction accounting has its own dynamics and demands, something all-too-frequently not fully understood until there’s a mess to clean up during, or immediately after, a project.

The less familiar someone is with construction accounting the more (unfortunately) certain they might be that there’s nothing that different from standard bookkeeping practices.

Construction projects of any size (beyond erecting a back-yard storage shed) have an enormity of detail exclusive to the industry. Construction projects can have dozens to thousands of workers, hundreds to millions of components, and lines of vendors and subcontractors the size of an army on the march.

Accounting for the expense, use, and percentage of completion, for every component of a construction project requires a special level of skill.

When you’re responsible for the profitability of a construction project, bring an accounting team on board on the front end that understands the complexities of construction project accounting. Have them monitor and observe throughout the project, and undertake thorough audits as the project progresses, to see red flags or dangerous territory.

The alternative is to trust that job fade, missed change orders, expenses and other financial factors aren’t occurring.

It’s fine to trust. It’s better to trust and verify.

Having a construction accountant who knows the nuances of the industry involved early and throughout a construction project helps track elements such as:

• Is the project set up with appropriate financial controls and safeguards?
• Are all aspects of the project, particularly change orders and other variations to the original plan and budget, accurately recorded, reconciled and paid for correctly?
• Are all expenses legitimate?
• Is money being bled-off in an inexplicable or questionable fashion that threatens the profitability of the project or that legal requirements are being met?
• Is there a bulge in expenses at some level of the project that indicates fraud, kickbacks, or some other form of corruption?
• What accounting details reveal inefficiency in the project?
• Does the project in the middle and end have any relationship to the project as planned, operationally and financially?

There are some businesses that view accounting like a trip to the dentist. But there are two ways to go to the dentist: one is to have something fixed that hurts; the other is to take preventive action to ensure as much as possible that nothing will happen to cause pain.

Don’t get hurt on a construction project. Bring in an experienced construction accountant and audit your project routinely.

Think of it as preventive care that will keep you out of the (financial, legal, and regulatory) emergency room.

What you want to hear on the back end of a project is “good job,” not “uh-oh.”