The Importance of Accurate Recordkeeping

February 21, 2023

The importance of establishing and maintaining accurate company records is substantial and plays a material role in the success of any company – even more so within the construction industry. Maintaining accurate information specific to activities throughout the life cycle of a construction project is used as substantiation to evidence completed or incomplete deliverables, satisfied contractual obligations, and the basis of key performance indicators (KPIs).

Accurate Recordkeeping as a Key Factor within the Construction Industry

Within the scope of construction project management, concise recordkeeping is critical as the information is used to identify and mitigate risk throughout the project life cycle as well as summarize post-project overall performance and “lessons learned” analyses.  

Break-Even Analysis and Profitability

Break-even analysis is a KPI used to determine the company’s baseline income requirements to cover fixed (and variable) costs and not having to realize losses.  This KPI is calculated as follows:

General Administrative Expenses or Fixed Costs

((Revenues-Cost of Goods Sold)/Revenues)

Identifying your break-even point is crucial in how you understand just how much revenue your business needs to generate in order to cover annual base costs and be profitable.  More specifically, this indicator enables the owner to formulate sustainable margins and pinpoint where costs are to be lowered or renegotiated.   

Essential Records Required to Calculate Break-Even Analysis:

  • Accurate Revenue Recognition processes
  • Accurate classification of Cost of Goods Sold
  • Accurate capture of G&A expenses

Accurate Recordkeeping for Contractors and Personnel

How does a GC know if subcontractors are being utilized efficiently and not wasting time – effectively diminishing returns?  Similarly, does employee productivity align with payroll overhead?  To put in better perspective, it is suggested that the American economy forfeits in excess of $7.0BN per day in productivity as a result of FTEs and non-FTEs not recording their man-hours (ref: Harvard Business Review).  Accurate recordkeeping for contract and regular personnel facilitates accountability, transparency into work processes and operational efficiency by identifying where resource demands are most needed. 

Essential Records Required for Time Tracking:

  • Full service internal/external Payroll Processing System
  • Accurate classification/capture of Customer Projects
  • Accurate assignment of contractors and personnel as expenditures to their respective Customer Project

Accurate Change Order Documentation and Tracking

Change orders are, in effect, addendums to original construction agreements.  These documents are drafted to make clear any modifications that are to be made to the project and that all parties are in agreement with the modifications and adjusted pricing.  

Accurate recordkeeping of changes and modifications will cease potential lawsuits in its tracks as this written document should mitigate project slippage and miscommunications ensuring that your client, subcontractor and you are literally on the same page. 

Essential Records Required for Change Orders:

  • Original agreement referenced
  • Detailed descriptions of Scope of Work revisions
  • Revised timelines
  • Adjusted pricing with breakdown substantiation

Accurate Recordkeeping for Tax Strategy and Preparation

For many, the mere mention of taxes causes mental pain and stress.  It doesn’t need to be this way at all.  Manage each month end as if it were yearend and you will find tax preparation and filing quite painless. Simply put, have a documentation plan for the running of your operations activities and stay true to that plan.  Consistent and sustained recordkeeping can practically fill out the tax return on its own if done correctly.  This will avail you or your accountant the time to focus on the firm's tax strategy and not getting “lost in the weeds”.  

Maintaining sound records facilitates the accurate tracking of profits, cost of goods sold and general administrative costs over the course of the year.  This allows the tax filer to map out a clear road for tax strategy and forecasts.

Accurate Accounting Documentation and the IRS

Maintaining detailed accounting documentation throughout the fiscal year will precisely reflect the information submitted to the IRS. Returns filed without written attestations or substantiated records will prove to be a challenge for any accountant – especially should the IRS require support for the filings.

Accurate Recordkeeping is Overall Good Business Sense

There will always arise challenges and difficulties over the lifetime of a company.  These challenges and difficulties will come in the form of customer disputes, lawsuits, loan requests and IRS audits, to name a few.  However, going into each of these situations with transparent, comprehensive, and available records that are accurate and concise, will empower a company enabling it to face adversity, having the advantage.  

The pros that outweigh the cons for establishing and maintaining accurate organization documents are voluminous.  Overall, when it comes to construction accounting, indeed, accounting industry wide, a sound and standardized recordkeeping program and methodology will prove to be a solid foundation to any firm's success.  Accurate recordkeeping also fosters confidence in third party assessors in that a company’s internal leadership not only understands ethical, legal and regulatory compliance, but embraces it. As it would be evident that an organization, your organization, is willing to invest the time, effort and resources to ensure accurate recordkeeping, you will find that bankers, investors, lenders and customers will be willing to invest in you.

Michael Jeter

Michael has an extensive career in corporate accounting & finance specifically in Capital Markets, Institutional Banking, Construction & Real Estate Finance and Risk Management.In addition, Michael also has extensive project management experience with an emphasis in financial systems implementation. Appointments as CFO, Vice President or Controller.

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