Do you find that the percentage of profits displayed on the financial statements for your construction firm doesn’t match the markup percent you bid out? It’s not uncommon to see these discrepancies, but there are ways to minimize them and maximize your profitability.
Construction firm accounting, overhead variables are constantly in motion as travel time, fuel costs vary by job site location, project timelines start and stop quickly, and inventory can be difficult to predict. Because of the variability, small mistakes can snowball into a larger financial issue easily. Here are some common mistakes to be aware of, so your team can be trained to avoid them.
- Inaccurate overhead calculations. Building overhead costs into your bid is important, and this figure can change for every job. Some bids are more labor-intensive, while others may need more tools and equipment and less labor. Using an estimate of labor only can leave discrepancies in the bid and the actual cost to your construction firm. When considering overhead costs, include tools used, job site insurance, delivery costs, permits, and fuel. It would help if you also calculated labor costs like hours worked, workers’ compensation insurance, overtime, training, taxes, insurance, and other benefits offered to employees. Average out the total cost of labor over hours worked to get an accurate depiction of what your hourly labor costs per employee truly is.
- Mismanaged change orders. Changes in construction jobs are not uncommon, so your team must know how to handle them. Create a process for handling change orders that includes the proper time for project leads and the accounting team to estimate the total cost of the change, so cost overruns from it aren’t eating into your original profit markup. Then, write that up into a contract addendum, so the client is aware of and agrees to the additional costs.
- Job costing and final payments. It’s important to know how your initial estimate compares to the final expenses and profit on any project. There is often a difference between the two, but many times large discrepancies are caused by poor job costing in the beginning. The costs of goods, services, and labor are constantly in flux – especially in the current market. Using generalized data from a year ago could be costing your construction firm money. Another issue is generalizing the costs for each job as a rough estimate. Establishing the tools to track current supply cost trends and labor costs accurately will help you write better bids that will serve your company and clients better in the future.
- Assuming everyone is honest and reliable. It would be nice if we lived in a world where everyone was trustworthy and honest, where people paid what they owed and did the jobs they were hired to do. Unfortunately, that’s not always the case. Before going under contract with a company, ask around to see if they have a history of paying their invoices and bills on time. When hiring specialists and contract workers, get references so you can determine their job performance. Are they professional onsite? Do they deliver the quality of work you expect in a timely manner? These are all important facts to know before going into business with anyone
- Contract loss reporting. Taking a loss on a project inevitably happens. It could be on purpose to build a relationship with a client that could bring more profitable contracts your way in the future. Or, it could be an accident because of poor estimates and job costing, as outlined above. Either way, it’s important to report those losses to the correct job instead of trying to hide them with profit from a different contract. Not doing so can lead to big accounting problems down the line. Make it a policy that labor, materials, and other expenses are reported in a timely manner for your bookkeeping team. Management will know when a job will cost the construction firm.
While changing how your firm handles bids, estimates job costs, or even deals with clients and contractors may seem like too much effort, implementing these systems will be more beneficial to your construction firm in the long run.
If you’d like an outside perspective on your job costing processes or advice on tools you can use to better track expenses and create estimates, contact our team of professionals today.