WHY CONSTRUCTION ACCOUNTING REQUIRES COLLABORATION
March 25th, 2016
Another tax year is in the books and as many of us are getting ready to start new projects, I encourage colleagues across departments to take a moment and reflect on the processes, means and methods that were successful and not successful in 2014. The New Year is a great time to reassess internal procedures and look for ways to help aid your company’s ability to track its progress.
Accounting in the construction industry is unique in that it utilizes the percentage of job or project completion and makes adjusting entries corresponding to those percentages. This GAAP (generally accepted accounting principle) enables firms to match revenues and costs in the same accounting periods, prevents dramatic swings in profit and provides more detailed financial reports. Can you imagine telling your boss one month the company lost $100,000 and then telling him/her the next month you gained $105,000, merely due to a timing issue? It is more accurate to match the cost with the corresponding revenue and determine the overall result; a $5000 profit.
To illustrate, suppose your firm purchases a significant amount of materials on December 31, 2014. Your Accounting department will enter this invoice and corresponding expense with the date of December 31. Since these materials were not installed on the project until January, you were not able to bill the owner for these costs until the installation and therefore the revenues are not recorded until 2015. If you prepared your financial reports based on these unadjusted entries, the costs and revenues are not being matched in the same accounting period resulting in large scale loss followed by large scale profit. Construction accounting is specifically set up to use work in progress schedules that smooth out these gaps between periods which results in a more accurate snapshot of the project’s progress. The accounting department relies on the information that it receives as much as management relies on the reports that the accounting department compiles. It is important that the accounting department knows how to accurately process incoming invoices and contract documents. Working collaboratively with the other departments is essential in order to accomplish this accuracy and fluidity. Accounting must be supported by internal controls to ensure that invoices received are approved, assigned to the correct budget codes and input into the correct databases. This equates to the finances being sorted and cataloged accurately in the project management information system and accounting software so the two can be reconciled.
I encourage everyone to critically think about how they can help create a smoother and more accurate 2015. Is there a way to track costs? Should the accounting department be cc’d on that email? Can the accounting department develop a report tailored to your project needs? As a General Contractor and/or Construction Manager, it is imperative that the entire team accurately tracks the progress of projects and budgets to ensure our own success, but more importantly, the success of our clients.