The Consequences of Poor Bookkeeping in Construction Projects

When most people think of construction, they hardly, if ever, think about bookkeeping.

When most people think of construction, they think of heavy machinery, hard hats, and harder-working men and women collaborating on a project none of them could complete alone. They hardly, if ever, think about bookkeeping.

And yet, successful site managers know the importance of well-kept books. To keep the financial health of a project intact, someone has to keep track of fluctuating expenses such as travel time, labor, debris removal, and tool delivery. Someone has to make sure numbers are recorded and reported correctly, keeping the business from accidentally misreporting expenses leading to inaccurate billing or, at worse, the incurring of fraud allegations.

When these tasks are not done well or not completed at all, the resultant accumulating impact can hit like a tsunami, wiping not just your project’s chances of success but your organization off the map entirely. In this article, we’re going to break down the possible consequences of poor bookkeeping and show you how to avoid back-office issues impacting your project and your business.

Budget Overruns 

The first and most immediate consequence is letting the budget get out of control. Bookkeepers perform the vital role of analyzing all of the company’s expenses, and then setting targets for leadership to hit to ensure profit. If expense reports are incorrect or missing, however, leaders may accidentally overspend while believing they are within budget. The effects may vary from an accumulation of over-budget items tanking profits, to false financial statements causing concern (and oversight) from regulatory agencies.

To avoid this occurring, you need to be able to recognize and repair these kinds of financial leaks. There are three main types of budget overruns to watch out for. They are:

● Technical overrun: Typically occurs when data collection during the planning phase is incomplete or riddled with errors.

● Psychological overrun: Lowballing project time or scheduled hours for a project during planning, only to be confronted with cold, hard reality.

● Economic overrun: Also known as scope creep, this occurs when leaders don’t have a firm grasp on the project’s overall scope and have to adjust on the fly.

You can avoid most of these by making sure your project planning is as thorough as possible. Research your vendor’s reputation, vetting them to make sure they’ll deliver as promised. Get pricing for the materials needed early on, and schedule your deliveries in advance to avoid unexpected hiccups before the project begins. As your organization gets more advanced, you can also use computer vision to avoid technical overrun. Computer vision uses AI to assess jobsites and improve the accuracy of estimates as well as data collection.

It’s also important to acknowledge that there are always factors you can’t plan for, so have both risk and cost management plans on deck for when plans inevitably face challenges.

Project Delays

Speaking of factors you can’t plan for: let’s address the subject of project delays. Project delays have been common for even seasoned construction industry veterans in recent years. Supply chain issues, recent conflicts, and even new post-pandemic regulations have slowed or halted materials shipping, putting leaders in a very tough spot. How can leaders avoid these kinds of delays, and when they occur, how can they respond in a way that saves face and gets the project back on track?

Good bookkeeping can help companies manage project delays, cost overruns or timeline extensions. However, there are project delays that you can’t avoid, and for those, it’s important to have a response planned out.

Keep your client informed as you progress through the project. If a delay looks inevitable, communicate exactly what is causing the delay, why, and how long you estimate it will be before the issue is resolved. Communicate calmly and clearly, as showing any sort of frustration can impact the customer’s view of your professionalism and reliability.

Going the extra mile also tends to help preserve client relationships. While you’re talking with the client, explore options to mitigate possible revenue losses on their end. Helping them reopen early, providing them with noise-canceling equipment, and showing them alternate travel routes to their place of business — these are the measures that show you’re easy to work with, and that you genuinely care about the inconvenience.

Legal Complications

Finally, we get into one of the most frightening consequences of poor bookkeeping: legal trouble. Construction regulations are strict and notoriously unforgiving, and it doesn’t really matter to the IRS if your organization breaks those laws unintentionally. Accidental misreporting is still considered construction fraud, and can carry with it a hefty fine, reputational damage, and if it’s severe enough, even closure.

The best way to avoid getting scrutinized by Uncle Sam is to set up an internal auditing checklist before the auditing process starts. It’s still possible for even the most meticulous workers to miss vital details when going through a massive amount of documentation. An internal auditing checklist helps set the goals of the audit beforehand, identify performance indicators, and rapidly take action to resolve inconsistencies.

Legal complications related to construction fraud can have serious implications for your business, even in other countries. Making sure your bookkeeping is accurate, up-to-date, and sent promptly to the relevant agencies is critical to protecting your business and ensuring its longevity.

In Conclusion

Bookkeeping is a vital, if understated, aspect of every successful construction business. We hope this brief guide taught you everything you needed to know about the dangers of improper reporting and how to avoid them. Keep a pulse on your business, check your records often, and make sure you plan projects as thoroughly as possible – you’ll be in the clear, and set to make the profits your organization deserves.