Construction accounting in Canada: The foundation your business needs

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A glimpse into the Great White North’s building industry, its unique accounting demands and the most common mistakes to avoid

Construction is a big business in Canada. According to BuildForce Canada and national statistics:

  • 1 in 13 workers in Canada works in the construction industry, employing more than 1.4 million people in total.
  • The construction industry accounts for 7% of gross domestic product (GDP).
  • On average, the annual worth of construction projects is $241 billion.
  • There are currently more than 360,000 construction firms across the nation.
  • In 2017, most of the sector’s labour force can be found in Ontario (36%), Quebec (18%), Alberta (17%) and British Columbia (16%).

Here’s a quick overview of why the building industry is different and how construction accounting caters to the sector’s needs—plus, the biggest pitfalls to watch out for.

 

Construction in Canada: Risky, unpredictable and likely to fail

Construction projects can last for weeks, months or even years. Trickier still is how one can be an employer and a contractor at the same time. There is also not a fixed structure since the workforce is typically mobile, with employees or contractors working on multiple projects simultaneously.

Add low profit margins and undercapitalization to the mix, and construction also outstrips most industries in insolvency and bankruptcy filings. Together with manufacturing, retail trade, transportation and warehousing, accommodation and food service, the construction industry represented 60 percent of all business insolvencies between 2007 and 2016.

 

Construction accounting: Building with numbers to succeed

Because of the industry’s unique settings and operations, it also calls for its own brand of accounting. Construction accounting manages invoicing and payment in the same ways a normal business would, but construction accounting factors in progress-based ‘draw’ and billing, cash versus accrual, the duration of a project and the use of vehicles and equipment.

For small business owners in construction, cash flow is often the biggest pain point. This is why accounting must be part of your regular workflow, from reviewing expenses to generating invoices and providing accurate job costings. In construction specifically, issues can escalate quickly.

 

Common mistakes to avoid

Earlier this year, British construction giant Carillion PLC filed for liquidation, prompting its Canada branch to file for creditor protection. At the heart of its parent company’s failure is delayed payments and overreaching. The story, though unfortunate, is also one that is common and preventable.

Here are some of the top accounting mistakes construction companies must avoid.

1. Inaccurate job costing
This can be in the form of inaccuracy from lack of data (i.e. labour, materials, etc.) or the exclusion of revisions to changes in the job order. For ongoing projects, a monthly or bi-monthly review is crucial to eliminate errors and update cost information. If the estimation you provide is wrong, your business has suffered a loss before the job has even begun.

2. Failure to record or report losses
During peak periods, it could be days, weeks or even months before updates are recorded. Failure to record and report losses in a timely manner not only eats into your revenue, but it can add up exponentially and quickly when not monitored.

3. Archaic methods
Using pen and paper to manually record employee hours and report transactions increases the likelihood of errors. Instead, deploying a mobile time tracking solution and utilizing cloud accounting means your employees or accountant can log in and out from anywhere to access real-time updates on what teams are working on, as well as other pertinent information such as when and where work is performed.

 


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1 Comment

  1. Albert says:

    Great Post, Thank you for sharing

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