7 Contracting and Construction Accounting Mistakes to Avoid

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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:

1. Being too aggressive when estimating the total cost to complete a project.

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.

2. Recording unapproved and unbilled change order claims.

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.

3. Having completed contract accounts receivables greater than contracts-in-progress accounts receivables.

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.

4. Failing to prequalify the project team.

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’:

  • Financial history – Know the financial strength of the project team with which you intend to work.
  • Litigation history – Use databases such as Public Access to Court Electronic Records (PACER) and Lexis Nexus Court Link to ensure your potential project team members have never encountered legal problems.

5. Overlooking unreasonable contract terms.

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:

  • Clauses requiring you to review the contract and design documents and report errors and omissions prior to starting work, with consequences for failing to complete this task.
  • Indemnity provisions that hold you responsible for breaches of contract, personal injury or property damage, regardless of who caused the injury.

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.

6. Failing to tailor project documentation practices.

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.

7. Lacking open jobs to cover operating costs in the subsequent year.

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.

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