We are excited to provide this “letter to the editor” style post. This executive email was provided as a response to our “Training Manual” series. The writer delivers an experience as a construction professional with an accounting background. Started as a small owner-operator of a north-western construction firm and later moved into the role of CFO for a large, national construction firm with 12 offices across the country. We appreciate your time and expertise as a new addition to our training manual series!
As the CFO of a $100 million revenue construction company, I’ve seen firsthand how complex and challenging construction accounting can be. Unlike traditional industries, construction involves unique processes like AIA billing, change orders, work-in-progress (WIP) adjustments, and multi-state payroll compliance. Without a strategic approach to financial management, even highly profitable projects can turn into cash flow nightmares.
I appreciate your guys’ website and hope my insight can help business managers better understand their construction accounting practices. In this document, I’ll break down the most common financial pitfalls in construction accounting and share best practices that have helped our company thrive. Whether you’re a contractor, project manager, or financial leader, these insights will help you optimize profitability and maintain financial stability in your construction business.
Construction companies often make accounting mistakes that lead to cost overruns, cash flow issues, and inaccurate financial reporting. Here are nine of the most frequent pitfalls I’ve seen in the last 45 years of construction business:
1. Not Tracking Committed Costs Daily
Contractors often overlook costs that have been committed but not yet spent, such as subcontractor agreements and material purchase orders. If these aren’t tracked in real time, projects can quickly exceed budgets.
Solution: Implement real-time cost tracking software that provides visibility into every dollar committed.
2. Confusing Margin with Markup
Many contractors mistakenly use markup to estimate profitability. However, markup (cost + percentage added) and margin (profit percentage of sales price) are not the same.
Solution: Educate project managers and estimators on how to correctly calculate profit margins.
3. Confusing Percent Spent with Percent Complete
Spending 50% of the budget doesn’t mean 50% of the work is done. This misunderstanding leads to inaccurate job progress evaluations.
Solution: Use WIP reporting to track actual project completion against costs incurred.
4. Not Running Frequent WIP Reports
Without real-time WIP reports, financial decisions are reactive rather than proactive, increasing the risk of project losses.
Solution: Generate WIP reports at least monthly to track profitability.
5. Not Adjusting WIP in Financial Statements
Failure to adjust WIP on financial statements results in inaccurate profit-and-loss reporting.
Solution: Ensure WIP adjustments are reflected in P&L statements and balance sheets.
6. Not Tracking Equipment Costs Properly
Many contractors fail to account for ownership, maintenance, and operational costs of equipment, leading to profit loss.
Solution: Allocate equipment costs to specific jobs using automated tracking software.
7. Not Tracking Unposted Payroll
Unprocessed payroll costs should be reflected in real-time financial reports, but most standard accounting systems lack this capability.
Solution: Use construction-specific payroll software to track labor costs before payroll is processed.
8. Delayed Labor Hour Tracking
Workers submitting time sheets late results in inaccurate job costing.
Solution: Implement mobile time-tracking tools for daily updates.
9. Confusing Overbilling with Profit
Overbilling creates cash flow but should not be mistaken for actual profit. It represents unearned revenue for work yet to be completed.
Solution: Keep separate records for overbilled amounts and adjust financial reports accordingly.
Five Best Practices for Construction Accounting Success
To maintain profitability, we’ve implemented these five critical best practices:
1. Job Costing: The Foundation of Financial Control
Every successful project begins with accurate job costing. We track costs for materials, labor, subcontractors, and equipment to ensure our jobs remain profitable.
Key Strategies:
- Implement job costing software to track real-time expenses.
- Review WIP reports frequently to monitor financial health.
- Educate project teams on the importance of cost tracking.
2. Cash Flow Management: The Lifeline of the Business
Cash flow mismanagement can destroy a construction business. We use job-level cash flow reports to anticipate financial needs.
Key Strategies:
- Use progress billing (AIA forms), unit billing, and T&M billing to match project needs.
- Track overbilling and underbilling to maintain accurate cash flow projections.
- Implement a strict invoicing schedule to reduce delays.
3. Payroll Tax Compliance: Navigating Multi-State Regulations
With employees working in multiple states, payroll compliance is a major challenge. Every new jurisdiction brings different tax regulations.
Key Strategies:
- Include payroll staff in project bidding to assess tax implications.
- Use construction-specific payroll software to automate compliance.
4. Field Visibility & Collaboration: Real-Time Decision Making
We eliminated paper-based tracking and now rely on mobile field management software to monitor job progress, labor hours, and equipment usage.
Key Strategies:
- Implement cloud-based field tracking solutions to connect job sites with accounting teams.
- Ensure project managers update job costs daily.
5. Effective Document Management: Staying Organized & Compliant
Lost or mismanaged documents can lead to legal disputes and financial loss.
Key Strategies:
- Use cloud-based document storage for RFIs, change orders, and purchase orders.
- Automate document tracking and approvals to prevent delays.
Implementation Strategy: Transforming Construction Accounting
Step 1: Assess Current Accounting Processes
Identify gaps in job costing, cash flow tracking, payroll compliance, field visibility, and document management.
Step 2: Select the Right Construction Accounting Software
Standard accounting tools like QuickBooks may work in the early stages, but growth demands specialized construction accounting software like Deltek ComputerEase.
Step 3: Train Your Team
Ensure project managers, accountants, and field teams understand job costing, labor tracking, and expense reporting.
Step 4: Implement Gradual Improvements
Start with small changes, such as real-time WIP reporting, before transitioning to a fully automated system.
Final Thoughts: Building a Financially Resilient Construction Business
Construction accounting isn’t just about tracking numbers—it’s about making informed, strategic decisions that drive profitability. By eliminating common accounting mistakes, implementing best practices, and leveraging the right technology, your construction business can achieve sustainable financial growth.
As a CFO, my advice is simple: start small, measure progress, and adjust. Accounting excellence doesn’t happen overnight, but every improvement brings you closer to a financially resilient and profitable future.
What’s Next?
If you’re looking to optimize your construction accounting processes, I highly recommend evaluating construction-specific accounting software that integrates job costing, payroll compliance, and real-time financial reporting. It’s a game-changer for businesses ready to scale.
