Top 6 Accounting Errors Construction Companies Make
Running a construction company and want to avoid the common accounting errors committed by construction firms? Yes, Construction is a growing industry in the United Arab Emirates, the growth of which is measured by its project efficiency and the time taken to complete a project. In most of the cases, accounting takes a backseat. Accidentally making a critical mistake on your construction companies accounting can be a problem. Below, we throw light on this topic by briefly pointing to some of the accounting errors made by the inexperienced in the accounts for construction companies.
Incorrect Allocation of Overheads to Jobs
Most contractors use a calculated overhead rate to allocate indirect costs to individual jobs. Indirect costs can include rent, utilities, depreciation, office salaries, etc. but are not limited. To prevent this error, revisit the rate annually to assess that the correct costs are being included and the most appropriate method is being applied. Based on the most critical component of the construction activity - labour or materials, the contractor is able to assess which method is most appropriate.
Misrepresenting Estimated Job Costs
Most contractors will typically use the ‘percentage-of-completion’ when it comes to account reconciliation, estimated job costs are the most important factor. These errors occur due to wrong estimations, elimination of revisions and incorrect actual cost accumulation. To ensure none of these problems surfaces and to successfully prevent errors such as this, both the actual cost and estimated costs should be compared and compiled on a monthly basis.
Improper Job Cost and Billing CutOff
While using the accrual basis of accounting, if the costs incurred during the reporting period are omitted, you might end up using an incorrect cut-off. You are committing this mistake when you receive invoices after the period which is not considered as a part of the closing section in accounts payable.
Cutoff errors arise when costs incurred are omitted during the finalization of financial statements, or when incorrect billings are utilized in the calculations. Procedures can be implemented to avoid these errors.
Failure to Record Losses
Construction companies that use the ‘percentage-of-completion’ method sometimes fail to consider whether a job is likely to generate a loss. Under such circumstances, it is required to fully recognize the loss at the time it’s determined as per the Generally Accepted Accounting Principles. You should have detailed knowledge of the status of the job and consistently update budget against costs throughout the project, to avoid making this error.
Challenges of IFRS 15
In the construction industry, companies are required to estimate the variable amount of consideration (relevant to unapproved claims and variations) to which they are entitled under the contract. When it is 'highly probable' that a significant reversal will not occur if the uncertainty is subsequently resolved, then the standard permits revenue recognition to an extent. The standard also requires additional disclosures around these areas so users can clearly understand the degree of judgment in the variable revenue. These key judgments are driven by management and are critical to representing the performance of a capital project at the financial year-end and over the life of the contract.
Not Seeking Professional Help
Making decisions without consulting a specialized accounting professional is a bad move for many construction contractors. If you have any queries relating to accounting for construction, feel free to contact us at CDA Accounting and Bookkeeping Services LLC. Access to the right information always encourages making smart business decisions. Our experts are at the receiving end to attend your call and answer your queries. CDA offers a one-hour free consultation.
Why choose CDA?
CDA is a successful accounting firm which provides impeccable accounting and auditing services in UAE. We have conducted internal and external auditing for various firms in profound detail and have effectively stirred up company performance.
Our well established and expert consultants focus on Internal Auditing Services, VAT Consultancy Services, Accounting & Bookkeeping Services, Accounts Outsourcing Services, CFO Services and Tax-Free Consultation in Dubai. If you want to get the best advice and service to improve your accounting, consider consulting with CDA Accounting and Bookkeeping Services.