5 Common Construction Accounting Risks — and How to Address Them
Kirsch CPA Group
Jul 07, 2021

The primary focus of most contractors is to complete projects according to specifications, on time and on budget. For some construction businesses, accounting tasks that support jobs can take a backseat. Unfortunately, without accurate and efficient accounting practices, you may be signing contracts that hurt, rather than boost, your bottom line. Here are five issues commonly confronted by contractors and how you can prevent them from hurting your bottom line.
1. Inaccurate Cost Estimates
Bad estimates can lead to bidding jobs too low and, when projects go forward, to faulty budgets with cost overruns. Line-item estimates are relatively simple to make for smaller jobs. But with larger, more complex projects you can easily underestimate costs.
Good estimates are detailed and account for all expected costs associated with a project. Although they take time to put together, it’s time well spent. Start at the task level and estimate from the bottom up. Determine what it takes to complete each jobsite activity, including materials used, equipment hours and labor hours. Use those jobsite tasks as line items that can be added or deleted if the scope of the job changes.
Regularly tracking job task costs is central to creating solid estimates. Compare your estimated costs against actual costs from past projects to determine where adjustments should be made in future estimates.
2. Overlooked Overhead
To develop a realistic picture of your job costs, you must accurately factor overhead. Fixed overhead costs include your office’s rent or mortgage, office equipment and supplies, licenses and fees, taxes, utilities, insurance and salaries. Because your company probably follows a regular payment schedule for these costs, they’re easy to calculate. However, there are variable costs that fluctuate by job, location and even season. These can include additional staffing, staging, transportation costs and equipment rentals, as well as “softer” costs such as advertising and signage.
Pay close attention to both fixed and variable overhead costs by regularly reviewing your income statement. Are expenses being properly allocated to the associated jobs? Are there any costs that aren’t accounted for? Are you factoring in equipment depreciation, administrative expenses and property rentals? Can you allocate variable costs to specific categories, such as soil conditions, geographic regions or climates?
3. Increased Market Prices
It’s no secret that construction supply chains and labor pools have been disrupted by the pandemic. For the foreseeable future, expect costs for materials, equipment and labor to increase. To help ensure you don’t have to eat the rising costs, ask for a deposit to buy and store materials prior to the start of construction.
Also, include in your contracts a price acceleration provision that allows you to make adjustments if market prices increase. To maintain a good relationship with the project’s owner, set a percentage threshold so if market prices change by an agreed-upon percentage, the extra cost will be invoiced to the owner.
4. Cash-Flow Crunches
Sometimes contractors only get paid when a construction job is completed. In the meantime, expenses — including payroll, interest and rental fees — usually add up. To prevent cash-flow problems, include in your project proposal a payment schedule based on agreed-upon dates or milestones. You also may want to consider asking for a deposit before the job begins.
5. Out-of-Scope Work
Even well-planned projects are subject to last-minute changes. Unforeseen site issues, bad weather, worker shortages and unavailable materials can force project teams to revise their plans. And owners may request add-ons or other changes that increase the job’s scope.
You and your project managers should work with your accounting staffers to compare real-time, actual costs against estimated costs throughout the project. If costs start to creep up, quickly make decisions to control them. Project managers and accounting workers also need to work together to determine whether new costs are feasible. If a project is headed toward unprofitability, you may decide to refuse extra requests.
Note that you should submit change orders and receive written authorization before executing new work. Be sure to bill for approved change orders immediately.
Pay Attention to the Numbers
Whether you own a small or large construction company, make sure you prioritize accounting and financial matters. Great sales skills and hard work on jobsites aren’t enough to maintain profitability. If you don’t have in-house accounting expertise, contact Kirsch CPA Group to help.
Contact us to learn more about accounting practices
© Copyright 2021. All rights reserved.

About The Author
Kirsch CPA Group is a full service CPA and business advisory firm helping businesses and organizations with accounting,…
Tags
Sign Up for Email Updates
Related Articles





















Tax Treatment of Debt Forgiveness: Watch Out for Tax Bills Delivered COD
- 01-18-23
- Kirsch CPA Group












Manufacturers: Be Aware of These 3 Business Tax Provisions Currently in Limbo
- 01-18-23
- Kirsch CPA Group



The Tax Deductible Mileage Rate for Business Driving Increases for 2023
- 01-04-23
- Kirsch CPA Group









Succession Planning Considerations for Construction Business Owners
- 12-14-22
- Kirsch CPA Group






Prevent Fraud at Your Construction Company With a Holistic Approach
- 11-30-22
- Kirsch CPA Group









Manufacturers Must Act Now to Maximize Depreciation-Related Tax Breaks for 2022
- 11-09-22
- Kirsch CPA Group



It’s Time for Businesses to Rethink Their Working Capital Practices
- 11-09-22
- Kirsch CPA Group









Social Security Wage Base and Earnings Test Amounts Increase in 2023
- 10-27-22
- Kirsch CPA Group



New Law Enhances Payroll Tax Break for Small Manufacturers’ Research Expenses
- 10-13-22
- Kirsch CPA Group







































How Buy-Sell Agreements Factor into Business Owners’ Estate Plans
- 09-14-22
- Kirsch CPA Group









SALT Cap Workaround Law Could Save Ohio Business Owners Over $100 Million
- 08-31-22
- Kirsch CPA Group
























How Manufacturing Companies Can Benefit from the Section 179 Expensing Deduction
- 08-04-22
- Kirsch CPA Group



























Could the Work Opportunity Tax Credit Help Your Construction Company?
- 06-23-22
- Kirsch CPA Group






Good News: IRS Boosts Standard Mileage Rates for Second Half of 2022
- 06-23-22
- Kirsch CPA Group
























Education Benefits Can Help You Recruit and Retain Smart Employees
- 05-26-22
- Kirsch CPA Group









Ensure Your Construction Accounting System Has the Right Features
- 05-12-22
- Kirsch CPA Group





















John Kirsch Named to Greater Butler and Warren Counties Business Hall of Fame
- 03-25-22
- Diane Glover






Manufacturers Need to Act Soon to Take Advantage of 100% First-year Bonus Depreciation
- 03-17-22
- Kirsch CPA Group



























Commission Fraud: Salespeople Getting Paid More Than They’ve Earned
- 02-04-22
- Kirsch CPA Group
















































Consider a New Approach to Meeting Your Business Real Estate Need
- 09-17-21
- Kirsch CPA Group
























Beware: Teleworking Arrangements May Cause State Tax Withholding Issues
- 08-18-21
- Kirsch CPA Group




































Supreme Court Finds No Standing to Challenge a Provision of the ACA
- 06-24-21
- Kirsch CPA Group






Labor Shortage: Unlock Solutions by Evaluating Your Employment Value Proposition
- 06-09-21
- Kirsch CPA Group









Material Participation Standard is the Key to Unlocking LLC Tax Losses
- 05-27-21
- Kirsch CPA Group









Know Your Legal Obligations Under the Americans with Disabilities Act
- 05-13-21
- Kirsch CPA Group



























PPP Loan Not Forgiven? There’s a Safe Harbor for Deducting Expenses
- 12-03-20
- Kirsch CPA Group












What You Need to Know About the Deferral of Payroll Tax Obligations
- 09-15-20
- Kirsch CPA Group


















PPP Loan Forgiveness – Significant Borrower Friendly Changes on the Horizon
- 06-04-20
- John Kirsch





















Tax Filing Deadline Remains April 15 – Payment Due Extended to July 15
- 03-19-20
- John Kirsch








































































Prepare to Receive a Social Security Administration No-Match Letter
- 10-15-19
- Kirsch CPA Group





















IRS Announces Changes for Personal Use of Employer-Provided Vehicles
- 06-10-19
- Diane Glover






























Watch Out for these Tax Issues When Planning for Your Business in 2018
- 06-26-18
- Diane Glover









What Image Does Your Organization Present to Large Contributors?
- 03-15-18
- Kirsch CPA Group



8 strategies to help you adapt to economic down turn without layoffs
- 02-24-18
- Diane Glover













































Remember To Take Required Minimum Distributions at Age 70 1/2 Or Face Penalties
- 02-17-17
- Sue Schloemer







































Time is Money: Don’t Spend Valuable Time Inputting Data into QuickBooks
- 06-18-22
- Diane Glover




