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Mistakes are common in contracting, but some are more detrimental than others. These “don’ts” can be costly, lead to litigation and construction accounting issues, and potentially ruin the reputations of the parties involved in the project. The construction CPAs at Doeren Mayhew offer seven mistakes and how to avoid them:
This problem is a result of contractors not being conservative in estimating profits on open jobs. As a result, an increase in underbillings could occur. This shows on the part of the contractor a lack of being proactive in billing for costs.
Solution: Avoid impacting your company’s cash flow by estimating all profits and billings on projects as early and conservatively as possible.
Although being proactive usually leads to positive results, being overzealous in recordings leads to negative financial outcome. With all of the risks that come within the construction industry, it is important to prepare a detailed change order that discloses all financial information before taking on a project. This will alleviate potential unwanted financial burdens in the future.
Solution: Ensure that a clear written agreement pertaining to timing and revenues is presented up front for any and all aspects of the project, and make sure you have a signed change order before performing any work.
A contractor who is unable to obtain new work is a serious concern for customers, and having completed contract accounts receivables greater than contract-in-progress can lead to this assumption. In addition, it assumes that there is a possibility of prior uncollected receivables.
Solution: Avoid this mistake by implementing an effective accounts receivable program that includes proactively contacting late-paying customers.
Having a well-prepared contract is critical to a successful construction project, and choosing the right people to carry it out is equally as important. Do not accept a project team for face value. Make sure thorough due diligence is conducted ahead of time.
Solution: Establish an efficient system to evaluate project teams before the job begins. While it may take some extra time or funds to complete this task, it could diminish significant problems and costs in the long run. Evaluate potential project team members’:
Although completing a contract on a job is not a walk in the park, it should not feel like a 50-mile run either. Unreasonable contractual terms should not be overlooked and automatically abided by. Taking the time to evaluate contract terms and whether you can reasonably meet them will help prevent uncompleted work and, ultimately, contract disputes. Look for unreasonable terms such as:
Solution: Thoroughly review contracts, and be assertive in addressing contract terms you deem unreasonable. Most will agree to adjust the terms. Contact your attorney for your company if you are not comfortable with any term specified in the contract.
Every project is different, and documentation should be tailored to fit the specific project standards. A contractor’s standard forms may invite those involved in the job to characterize terms as “delays” or “economically insufficient” if the terms do not particularly match their preferences. This enables contract manipulation by the project company, as documents are not in complete compliance with the company’s standards for contracted projects. Also, if project-specific clauses are not included, it opens the possibility of project members taking advantage of contract terms.
Solution: Understand the specific needs of each project at hand and ensure your documentation is appropriate.
This is a problem, as cash flow is critical to keep projects moving forward.
Solution: Resolve this concern by taking on extra jobs or even reevaluating operating costs. Best practices for increasing jobs include actively participating in the bidding process and getting involved in networking programs or organizations to meet more new potential customers. In addition, it is important to build solid relationships with customers to ensure your company is included in invite-only bids.
These common mistakes can become uncommon by following the above tips and ensuring accounting practices are effective. To learn more about the above tips or other advice on contracted projects, contact Doeren Mayhew’s dedicated construction accounting team in Troy, Houston or Ft. Lauderdale.
This publication is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional opinions on specific facts for matters, and, accordingly, assumes no liability whatsoever in connection with its use. Should the reader have any questions regarding any of the news articles, it is recommended that a Doeren Mayhew representative be contacted.
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