12 Red Flags Your Cost-Plus Residential Construction Accounting Needs Help - NOW.
WARNING - This is a whopper of a Post! It’s long, and it’s packed with very needful information. You’ve been warned.
If your system is broken, clunky or outdated, chances are you kind of know it. But do you really know how much it’s hurting you and your business? We don’t think so, because if you did, you’d be calling us screaming, “911! Emergency!” The truth is, the chaos that comes from relying on broken systems or bad habits is impacting about like the fire’s affecting this custom beach home build below!!
How do you know? Think about your current processes and systems while we list the 12 Major Red Flags to watch out for in your construction accounting processes. If any of these sound familiar, it’s time to take action. Like, Now.
1. You’re not creating your estimate using the same cost codes that are tracking your expenses.
Estimates that don’t align with cost codes make tracking actual costs against your budget nearly impossible. It’s like trying to assemble furniture without instructions—confusing, frustrating, and likely to end badly. You need to start with a template that uses and aligns with your cost code system. Don’t have a cost code list? We got you. Contact us and we’ll send you one for free.
2. You’re not uploading your signed contracted estimate into the same software that’s tracking your costs.
Your signed estimate is your financial blueprint. If it’s not in the system, how are you supposed to compare projected costs to actuals? Spoiler: you can’t.
If your presented contract estimate is not in the same format as your cost coding system, that’s ok. BUT, you need to develop a system that joins them together. You should be able to take your signed contracted estimate and know which cost codes made up those line items. That way, when the costs start rolling in and your financial ops coordinator is cost coding them, those costs will still produce reports that align with the signed contract. Don’t know how to make this happen? Contact us, we’ll set it up for you.
3. You don’t know how much is left outstanding on your committed costs—or worse, you’re not tracking committed costs against subcontractor bills at all! Yikes.
This blind spot leads to overspending and underbilling—two things that can tank your profitability…and FAST!
If this seems like a pie-in-the-sky type of tracking system, well we have airline tickets for you (too much? Sometimes my analogies are too much…but I just can’t help myself sometimes). Seriously though, Never rely on your subcontractor, vendor or supplier to track your commitments for you!!!
4. Double-Up: You’re not marking each bill as billable, so you don’t know which expenses have been added to the construction draw &/OR (even worse) You’re not adding expenses to your construction draws based on what’s been marked billable.
This one is HUGE! If you’re not tracking billable expenses, you are 100% leaving money on the table. I know that’s a very confident percentage but I know this to be true. You have missed recouping the money from job expenses that should have been marked billable but weren’t.
You need to recover every single billable expense possible. How? Follow the process. Mark each expense billable. Cost it to the appropriate job. Create the construction draw by adding those billable expenses to the draw. Every step is important.
5. You’re not reconciling vendor statements to your books.
Skipping this step is so tempting. It’s so easy to get that vendor statement and just issue a payment for the total on the bottom line. But, DON’T DO THAT.
Your financial ops coordinator NEEDS to be reconciling that statement to what they’ve been recording in the books. Why? Basically, the ripple effect. Bills may have missed being recorded (happens more than you want to admit). Now the total payment made from the bank or credit card doesn’t match the cumulation of bills and credits recorded from the specific period. Great. We can’t reconcile the bank/credit card statement. We don’t know where we’re messed up. Or worse, the bank payment is just recorded as a lump expense to Direct Materials, leaving all of those bills unpaid. Now allllll of our reports are off. Can I cry for you now?
So. Much. Wasted. Time. = So. Much. Wasted. Money.
Just reconcile those vendor statements to your books! Don’t know how? Contact us. We’ll show you.
6. You’re unable to quickly and easily provide PDF backup documentation for in-progress or past projects upon request.
As a cost-plus builder, you’re required to have the backup available at least when requested. If a client or lender asks for details and you’re scrambling to pull them together, it’s a sure sign your records are disorganized.
I’m going to take you to that pie-in-the-sky again - imagine - Each project construction draw delivered to the homeowner with every single pdf backup for that draw, and then also having the ability to download the entire project backup on a whim whenever you want as either one consolidated pdf with a table of contents or as a zip file with each cost as a separate pdf?
Sounds dreamy, right? Sounds like a reality and a necessity to us.
7. You have costs tracked against cost codes that aren’t in the estimate.
This mismatch makes it nearly impossible to identify which line items are over or under budget, and the time it takes for the financial ops coordinator to sit down with the project manager to figure it out is like a money pit.
Process solution help - Upload the signed estimate into the system. Then use a program that restricts cost code use by job. Finally, implement an approval workflow that includes at least both the financial ops coordinator and the project manager.
8. You’ve accounted for all payments received, but you still have open construction draws.
Or, you’ve recorded expense transactions, but bills are still showing as unpaid in your books. Either way, something’s not adding up.
This is a workflow issue and it’s a scary storm that’s brewing if this is happening in your books. If you’re not sure how to fix it, we will help you.
9. You don’t keep track of credit card transactions unless they’re job-related receipts.
Oy! We see this far too often. How do you reconcile a credit card without all of the transactions? You can’t.
Neglecting non-job-related expenses skews your financial reports and creates a misleading picture of your business’s health. Nothing to say here but record them ALL.
10. You’re not recording change orders.
Two words - Profit Fade. Yep. Just watch it fade away into a loss now. We understand this can seem like a daunting task or complicated process, but there are ways to streamline it. It’s absolutely needful and worth every bit of investment. Not to mention, recording and tracking change orders enhances your homeowner’s customer experience and solidifies that you’re a truly trustworthy GC. As always, if you’re not sure how you can accomplish this process and be able to repeat it with every change order that comes along, contact us. You know by now we’re the ones that will help you
11. Your profit margins seem smaller than they should be, but you can’t pinpoint why.
Misclassified expenses, missed billables, or poor cost tracking are likely culprits—and they’re all fixable once you identify them. This red flag might be the one you see but it’s just the symptom that shows there are more problems - a whole host of problems. Some of those problems are listed in the red flags above but this is where the effect of those issues will hurt the most.
12. You lack detailed job costing reports, making it difficult to assess project profitability. You don’t know what you don’t know.
Without job costing reports, you’re flying blind. These reports are essential for understanding what’s working and where you’re losing money.
Garbage in = Garbage out.
Why These Red Flags Matter
These issues aren’t just general bookkeeping hiccups—they’re specific to residential construction accounting. Ignoring them puts your business at risk of underbilling, overspending, and losing control of your finances!
If you have any of these - pleas let us help you. We specialize in helping turning that chaos into clarity.
From reconciling retainage balances to streamlining job costing, we’ll help you implement systems that set you up for success.
What’s Next?
If these red flags hit close to home, let’s talk about how Catalyst CAC can help you fix them. And stay tuned for Part 2, where we’ll cover general bookkeeping red flags that affect all industries.
