When managing a construction company there are lots of hats to wear. You have to plan and manage all the details of a project. This often includes logistics, budgeting, hiring good contractors or employees, estimating project costs, ensuring the legality of the project, keeping operations running on time, and more. An often overlooked area by construction contractors and business owners is how are they going to handle their taxes. Taxes are such a headache for most construction contractors. This is not exactly something you got into business to do in the first place. You want to focus on completing projects, not on keeping up with Uncle Sam’s ever-evolving tax laws. That’s where a construction contractor accountant comes in to play. A good construction contractor accountant will already know all of the ins and outs of the contracting business as well as understanding all the accounting nuances that go along with running a contractor business.
One of the biggest differences between providing general accounting services to your everyday business and providing speciality accounting services to a contracting business is the large number of tax variables that need to be taken into consideration. Normally, a business will sell a set of services or the same set of products from a single site or location over and over. By doing this, the taxes and accounting processes are much more straightforward. There is little variance in the day to day operations of the business, and the overhead costs remain the same. But when it comes to the day to day operations and tax considerations of a construction company, this is not usually the case.
The accounting and book keeping processes for construction companies are a bit different since they are more fluid and constantly in motion. With construction companies, you have ever changing inventory that is nearly impossible to keep track of, job sites at multiple locations, varying travel distances and project timelines that begin and end at any given time. Whether it’s production, overhead or sales, there are a lot of moving parts that make accounting for construction contractors different than your typical everyday business accounting.
When it comes to running the accounting books of your construction company, not only is it important to know what you should do. It is even more important understanding what not what to do. Simple honest mistakes can quickly turn into a large tax debt that will be a struggle to pay if you are not extra careful. And that is why we put this article together for you. We want you to avoid these common accounting pitfalls that often plague construction companies. Here are the top 5 mistakes contractor companies make with their accounting.
1. Poor Job Estimates
As you may already know, creating accurate job estimates is an art and science in and of itself. And as accountants, we understand, there is a lot to take into consideration when it comes to job costing. Yet, as construction company accountants, we commonly see poor job costing over and over again, but how can this be avoided?
For better job costing that will help eliminate losses, we recommend utilizing software (like Quickbooks) that will repeatedly create more comprehensive and accurate estimates. These software tools will provide you with up to date reports and will also allow you to look back at previous jobs or projects as references to help you nail down your next estimate.
2. Poorly Managed Changes
One of the ever looming constants in the construction industry is changes to the original project plan. It’s normally not a matter of if changes will occur to a project, it’s more of a matter of when will they occur and can they be executed while staying on budget.
While these changes may be part of the business, they can still be problematic for your accounting team. Project changes may bring you some quick revenue that you weren’t counting on, but project changes can also unknowingly shrink your profit margins just as fast.
In fact, it is not uncommon for change orders to eat up profits on a build. And when you combine that with inaccurate forecasting, you have the perfect storm or should we say, the makings of a financial disaster. How can you avoid a mess like this? By putting a procedure in place that allows you to thoughtfully deal with change orders you can be better prepared for when a project starts to go sideways.
3. Poor Tax Planning
The most common accounting system that we see among construction companies accrual accounting. With accrual accounting, your income is recorded when expenses are incurred.
But with invoices, you cannot plan on payments being made in the same time period as when they were sent out. When that occurs (which it will), your bottom line will not balance out correctly and the last thing you want is unbalanced books. Having unbalanced books is a dangerous spot for any construction company to be in because because you don’t want to be making financial decisions when your books are inaccurate.
Making major business decisions like should I buy this major piece of equipment this year or next year?; have I selected the right accounting method?; what is the the best corporate structure for this stage of the business; is now a good time to relocate operations? can all benefit from a seasoned tax planner. Sometimes, what initially looks like a good idea may turn out to be a very bad idea and that’s where a construction company accountant proves their weight in gold.
4. Missing Loss Contract Deductions
Once in a while jobs may prove to be unprofitable for your company, but they still can be worth finishing because of the future opportunities that they might bring. That’s understandable. However when dealing with loss contracts, you must make sure that you document those losses in your financial statements. If you don’t, this can lead to very big accounting issues for you and your company.
To avoid this common accounting mistake, you must inform your team members on just how important it is to report all expenses (labor, materials, repairs or otherwise) so you can properly determine loss contracts.
5. Missing Overhead
Most construction companies tend to have very high overhead. Whether it’s insurances, rentals, tools, labor, equipment, maintenance, training, workers’ comp, this all adds up to lots of work for the accountant. Unlike construction companies, most business have far less to account for and their accounting is easier to do, but with a construction company, it’s very, very easy to miss some expenses.
One of the biggest accounting problem areas for construction companies that we have identified is when labor costs are the only or main consideration for overhead for any given project. The reason this is a potential problem is because labor can greatly vary from project to project. Especially, when a project can be done more efficiently by using more equipment and less hours of labor. In this case, we ofter see construction companies under budget their overhead.
As you can imagine, if these miscalculations happen a few times, this can put your company in a financial mess pretty quickly.
So remember, each project is quite unique and presents its own challenges and accounting considerations. So, having flexibility in your job costing is very important to helping keep accurate accounting records.
Below we have compiled the following list of tax deductions that contractors should consider claiming when filing their taxes. This list is pretty comprehensive and we hope you find a few items on the list that you did not think of.
• accounting (professional services)
• advertising and marketing (digital and traditional)
• bank fees
• business gifts
• car and truck (actual expenses or mileage)
• casualty and theft loss
• charitable contributions
• construction industry attire (steel toed boots, tool belt, hat, durable pants etc…)
• earned income credit
• employee salaries
• equipment purchases (ladders, heavy, machinery, small tools, compressors, cements mixers, etc… )
• equipment rentals
• home mortgage interest
• home office (computers, utilities, business use of home, printers, & more)
• internet and cell phone
• licensing and fees (renewals)
• medical and dental expenses
• mileage for travel
• memberships (unions, business associations, leagues, organizations)
• office rent or lease
• office supplies
• retirement contributions
• sales tax
• self-employment tax
• start-up costs
• subcontractor expenses (contract labor)
• subscriptions to industry related trade magazines and journals
• trade related tuition
If you have any questions concerning taxes and accounting, we would love to talk.