Experienced construction bookkeepers can make contractor accounting something you no longer have to dread. Find out how they can help you avoid these 10 common mistakes!
10 Common Construction Company Mistakes (and how Construction Bookkeepers Can Help Avoid Them)
1. Failing to Keep Good Records
As the old rule of thumb says, “If you didn’t write it down…it didn’t happen.” Too many contractors make verbal promises about one job as they rush off to the next one…only to forget what they said.
To run your business well, you must maintain good data management habits. As soon as a decision is made about a project, get it written up officially (as an invoice, change order, or even an email) so there is a clear paper trail that everyone has signed off on.
Make sure you’re keeping receipts for every purchase you make too. Construction bookkeepers can help you manage your financials only if they have accurate information! Time spent keeping good records equals money in your pocket.
2. Having Untimely Invoicing Habits
Contractors are so busy trying to get projects completed that they often don’t have much time to spend preparing and sending invoices. That’s why having a good construction bookkeeper on your team is essential.
If you don’t get paid, you don’t make money. Here are some common invoicing mistakes:
- Waiting too long to invoice – If you forget to invoice clients on time, your workers and vendors aren’t likely to be willing to wait another month to get paid. Stay on top of invoices as soon as work is completed in order to keep the money flowing.
- Not enforcing timely payments – If people feel like they can get away with not paying you on time, they will. Enforce timely payment by simply sending polite reminders the week before payments are due. That lets them know that you’re paying attention and expect to be paid on time.
- Paying invoices to the wrong accounts – This goes back to good record keeping. If you aren’t careful when invoicing multiple jobs at once, you’ll allocate money to the wrong accounts. Or a simple address mistake on the invoice will cause problems later. Check your work carefully, or better yet…work with good construction bookkeepers who will!
- Charging too little for change orders – When a customer adds to your workload in the middle of a job, it affects everything. You can minimize it by having clear change order policies in place upfront and being sure to charge extra for them.
Avoid These 9 Common (and Costly) Accounting Mistakes
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3. Not Managing Retainage Well
We covered this in a recent post on “How General Contractor Accountants Can Help You Avoid Costly Mistakes”, but it’s worth repeating. Since it is common for clients to withhold payments until certain project benchmarks are met, it’s important for contractors to not count that money until it actually comes in. Don’t make the mistake of spending now because you think you’ll be getting paid later. If something goes wrong, you’ll be the one who suffers.
4. Paying Vendors Before You Get Paid
Along the lines of the last point, make sure you’re not the one shouldering the financial burden of making sure the project gets completed. When you depend on 3rd-party vendors to get what you need to do the job, it’s tempting to go ahead and pay them quickly. However, you can avoid coming up short financially by structuring your agreements so that your payment terms with your vendors are longer than the client’s terms are with you.
5. Not Knowing Your True Costs
This is a big one! We’ve seen far too many construction businesses suffer because of this mistake alone. Contractors who are desperate to win the bid fail to accurately estimate what it will cost to get the job done. As a result, they overspend and are underpaid…a recipe for business failure every time. Here are just a few ways this mistake shows up at the job site:
- Using labor rates that don’t factor in variables like taxes, insurance, worker’s compensation, or downtime (to name a few).
- Not planning for overtime when unexpected events like weather, accidents, or supply chain issues force you to make up for lost time.
- Not factoring in wear and tear on equipment and vehicles.
6. Forgetting to Make a Profit
Ultimately, you want your business to make a profit. Otherwise, it’s just an expensive hobby. If you’re not careful in the construction, you can quickly eat into your profit margin and end up working for free (or worse…losing money over and over). A couple of ways contractors give away profits is by:
- Charging the same profit and overhead on every job. Not every project is equal. It can actually cost you more to do several small jobs than a few large ones. That’s why the markup percentage on smaller projects is typically higher. If you charge that same rate in a bid for a big job, you might lose the contract. The profit margin on jobs you don’t get is always zero. Consider taking a lower percentage of a bigger deal to stay competitive.
- Guessing at markups. Never, never, never guess at costs or markups. Take the time to get real numbers for every job you do. Construction accountants can help you stay on top of having accurate information.
7. Not Having Enough Cash
We cover this in more detail in a post we did called “4 Winning Strategies on How to Manage Cash Flow in Your Business.” It’s worth taking a minute to read. Bottom line: be intentional about making sure you have cash for when (not if) the storms of life come.
8. Using One Job to Fund the Next
When you use the revenue coming in from one job to pay for the expenses on a second job (while both are going on at the same time), you’re asking for trouble. There is no margin for error, and without a cash reserve—see the previous point—you will create a disastrous domino effect. Construction bookkeepers can help you avoid this mistake by making sure you fund each job on its own when you bid on them.
In a typical business, payroll can be a headache. Construction is anything but typical, and payroll problems can quickly turn into full-blown migraines! It’s not unusual to have multiple employees working on multiple sites…sometimes in multiple states! You’ll thank yourself for trusting this to a pro who understands construction bookkeeping.
Construction software company, Viewpoint, has a good article on “5 Ways to Untangle Your Payroll Processes” too.
10. Trying to do it all yourself
The last mistake on our list is probably the most common. Contractors are good at building things from nothing, and most likely, you’ve built your business from scratch when you were wearing all the hats at once. Now that you’ve proven that you can be successful, don’t make the mistake of thinking you can do everything that your company needs done.
As your business grows, your job needs to shift away from you working in your business to working on your business. Delegate tasks to others that anyone can do so that you are free to do what only you can do. You’ll be a lot happier…and so will your family and the rest of your crew!
Trust Your Construction Bookkeeping to People Who Know How to Avoid These Mistakes
Construction accountants who understand how your business operates are worth the investment. The amount of time, stress, and money you’ll save partnering with people you can trust to manage your finances and give you good business advice is priceless.
CRS CPA has been guiding contractors just like you to financial peace of mind for over 40 years. Give us a call at (731) 668-4482 or schedule a call with one of our team today to find out what we can do for you.