How to Enhance Construction Compliance and Audit Preparedness
In the world of construction, compliance and audit preparedness have become critical components for success. With complex regulations and rigorous auditing standards, construction companies must ensure their financial reporting is accurate, transparent and in line with industry standards.
Emphasizing compliance not only safeguards against penalties and legal liabilities but also fosters a reputation of trust and reliability with clients and stakeholders.
To navigate these challenges effectively, many construction companies are turning to outsourced accounting solutions. They can help you streamline financial processes, implement robust internal controls and deliver comprehensive financial and management reporting, paving the way for a smoother audit experience.
How do you enhance construction compliance and audit preparedness?
Let’s get started!
Identifying Common Compliance and Regulatory Challenges
Compliance and regulatory challenges can pose significant hurdles for companies seeking to maintain integrity and adhere to legal standards. It’s important to identify what some of these challenges are in order to implement proactive strategies and avoid costly consequences.
Here are four common challenges faced by construction companies:
Labour Regulations
Complying with labour laws, safety standards and wage requirements can be complex and demanding for construction companies.
Failure to adhere to these regulations may lead to fines, legal disputes, audits and reputational damage. Non-compliance may also result in accidents, injuries and litigation, which further impacts the company’s credibility.
Environmental Compliance
Construction projects often involve environmental concerns and strict regulations. For example, if fuel was spilled on the road, it’s an environmental concern and there are regulations governing what to do.
Failure to meet environmental standards can result in penalties, project delays and public backlash. Non-compliance with environmental regulations may lead to harmful impacts on ecosystems and communities, leading to costly clean-up efforts and damaged reputation.
Contractual Compliance
Construction contracts are very common in the industry and companies must diligently adhere to contract terms and conditions.
Failure to meet contractual obligations may lead to contract disputes, financial losses and damage to business relationships. Non-compliance can jeopardize future project opportunities and hinder the company’s growth prospects.
Financial Reporting
Construction companies face unique challenges in financial reporting, particularly regarding revenue recognition and project accounting due to the nature of the industry.
Failure to meet various accounting standards and tax regulations may trigger regulatory audits, financial restatements and potential legal liabilities. Non-compliance can erode investor and stakeholder confidence and tarnish the company’s image.
Building a Strong Foundation for Compliance
How do you overcome these compliance and regulatory challenges? You need to build a strong foundation for compliance. How do you do that?
There are three main areas that businesses must focus on:
1️⃣ Implementing Effective Financial Management Systems
Effective financial management systems are the backbone of compliance as these systems focus on inputting financial data and providing reports for decision-making. Everything that affects financial reports feed to or are housed in this system.
Here are some examples of systems that construction companies can implement:
Cloud-based accounting software
Cloud-based project management software
Electronic expense report submission and approval
Electronic PO creation, submission and approval
Electronic payments
Automatic timesheet tracking and approval
Cloud-based payroll processing software
See the trend with these examples? There’s a reason I indicated ‘cloud-based’, ‘automatic’ and ‘electronic’. Implementing these reduces the risk of human errors and maintain transparent and up-to-date financial records.
2️⃣ Establishing Internal Controls for Data Accuracy and Integrity
Internal controls are essential safeguards that construction companies put in place to prevent inaccuracies, fraud and unauthorized access to sensitive data. These usually covers Order-to-Cash (O2C) and Procure-to-Pay (P2P) processes.
For smaller construction companies, it may not be feasible to implement robust internal controls but the owner is typically reviewing everything.
Here are some examples of internal controls that construction companies can implement:
Timesheets to be approved by site supervisor and project manager
Purchase orders, bills and expense reports for the projects to be approved by the PM
Each user gets a separate login to the financial system with specific access
All payments to be reviewed by the Controller/Accounting Manager/Owner
Delivery/packing slips for materials to be sent to the AP team for matching
3️⃣ Specialized Construction Accounting Software
Tailored construction accounting software addresses the unique needs of the industry, offering features such as job costing, progress billing and change order management. These can also be achieved with a construction-specific project management software that integrates with the accounting software.
The goals of these systems are to ensure seamless data flow, real-time collaboration and real-time information. This specialized software streamlines project-specific financial reporting so you can monitor and allocate costs accurately and review project profitability.
Financial Reporting Best Practices
As we seen in Financial Reporting for Construction Stakeholders, financial reporting provides crucial financial insights to management and various stakeholders to guide decision-making. It needs to be transparent, timely, accurate and efficient in order to be effective.
Financial statements with these attributes above enable stakeholders to assess the company’s financial health, monitor project progress and make informed decisions. Accurate reporting also ensures compliance with tax laws, accounting standards, contractual obligations and industry-specific regulations.
Here are some tips for preparing comprehensive financial statements for audit/review (check out this blog that explains what an audit and review is):
Maintain detailed records of income (includes progress billings, Certificate of Payment if applicable, contracts, change orders)
Maintain detailed records of expenses (includes invoices, packing/delivery slips, cheque stub or EFT support, approvals, and indication of project)
Maintain detailed payroll records (includes timesheets, tax calculations, tax compliance, personnel files)
Reconcile AR, AP, Holdback and bank control accounts on a recurring basis
Have evidence that you review your projects results and forecast on a recurring basis
Have a clearly documented process that identifies who’s doing what
Document any accounting policies used
Contract and Documentation Management
Effective contract and documentation management is important for construction companies striving to maintain compliance and audit preparedness.
Here are two areas to focus on:
Ensuring Proper Contract Review and Adherence to Contractual Obligations
Thorough contract review is crucial to understanding the rights and responsibilities of all parties involved in a construction project.
For example, it’s essential to review:
Contract terms and conditions
Project deliverables
Payment schedules
Milestones
Performance benchmarks
Holdback requirements (in addition to requirements in the Construction Act)
Adherence to contractual obligations prevents disputes, mitigates risk of non-compliance and ensures smooth project execution.
Managing Change Orders and Their Impact on Financial Reporting
Change orders are extremely common in construction projects but they can significantly impact financial reporting and compliance. For example, if you are doing excavation and you come across a manhole that you didn’t know was there, it may require a change order to rectify.
Proper management of change orders involves assessing their financial implications, updating project budgets and revising revenue recognition.
Formal changes are usually documented through a change order, however, there may be cases where you are asked to do the work first (could be through a Change Directive or it might be called something different) before an amount is settled on. Make sure to also assess the financial implications of this.
Here are some examples to improve the management of change orders:
Promptly recording approved change orders (from client and to subcontractor)
Issue change orders to your subcontractors on a timely basis
Get your subcontractors to confirm the change order(s) by requesting a signature
Update project budgets for any additional cost that’s required to be spent
Track your extra costs against the change orders (so you can see the profitability of it)
Let your finance team know that change orders have been approved
Make sure the updated numbers are included in your revenue recognition calculations.
How Outsourced Accounting Can Help
We just went through some common challenges with compliance and regulatory challenges, how to build a strong foundation for compliance and some best practices for financial reporting. Now, how can outsourced accounting firms help?
Ensure Compliance with Accounting Standards and Regulations
Outsourced accounting firms are well-versed in the complexities of accounting standards and regulations, especially those who have experience in the construction industry.
Here are some examples how they can help in this aspect:
They help construction companies navigate the complexities of the Percentage of Completion Method
They work with your team to understand the numbers
They ask questions on your projects to ensure that the estimates are reasonable and makes sense
They ensure you are compliant with regulations which prevents any penalties or interest
They help construction companies understand the numbers useful for decision-making
They can help you have more control over the finances of your company
Handling Contract Compliance
Outsourced accounting firms can also handle contract compliance and they ensure that the financial implications of each contract are understood and adhered to. Of course, it’s also important to get legal advice regarding the contracts.
Here are some examples how they can help with this:
Identify milestones which may trigger a progress billing at that particular stage
Review payment terms (although you can’t contract out the payment timelines in the Construction Act)
Ensure that progress billings and invoices are submitted by a particular date
Ensure that all documents required as part of the progress billing submission or invoices received are complete
Identify any holdback (and amount or percentage) if the contract requires
Staying Up-To-Date with Compliance Regulations
Outsourced accountants keep abreast of changing regulations and industry-specific compliance requirements. By continuously monitoring updates, they help construction companies adapt their financial practices to remain compliant.
Here are some examples:
Ensure your company follows the latest tax and accounting rules
Takes professional development courses to remain on top of changing regulations
Helps your company update processes to align with any new and updated regulations (for example, this may have been the case with the revamped Construction Act)
Improved Audit Preparedness
Outsourced accounting firms help construction companies maintain meticulous financial records and internal controls while anticipating and addressing potential audit queries.
Here are some examples of what they can help with:
Prepare all audit/review working papers and schedules
Work with your team to prepare any variance analysis
Reconcile all accounts (like AR, AP and bank control accounts, payroll and job costing)
Organize all documentation so auditors can easily find the information they are looking for
Review your internal control processes throughout the year and identify and fix any deficiencies
Handle audit interactions and questions
Your Turn
If you’re in the construction industry, whether you are working on small scale residential projects, large commercial developments or anything in between, you need to make sure you are compliant with accounting standards and regulations and are prepared for any audits that may occur.
How do you enhance construction compliance and audit preparedness? There is one optimal solution for you and that is Outsourced Accounting Services!
We went through some common compliance and regulatory challenges, how to build a strong foundation for compliance, financial reporting best practices, contract and documentation management and actual examples of each.
This blog focused on how Outsourced Accounting Services can help you enhance construction compliance and audit preparedness.
Outsourced accounting is a strategic solution for your accounting needs because they can help you Comply with Accounting Standards and Regulations, Handle Contract Compliance, Stay Up-To-Date with Compliance Regulations and Improve Audit Preparedness.
How else can Outsourced Accounting Services help you?
Partner with us and let us handle your accounting burden while you focus on what you do best!
Unlock your business’s full potential by outsourcing your accounting needs to us. With our firsthand experience in accounting management roles within small to medium sized businesses in the construction industry, we bring the experience and insight necessary to drive your financial success.
Contact us today to explore how our outsourced accounting services is the optimal solution for you!
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At JTL CPA, we are Ontario’s virtual accounting firm. Our goal is to automate your accounting and bookkeeping processes in a way that increases financial visibility. Pair that with our value-added approach and tailored advisory solutions gives you the ability to make sound decisions from good data. Check out our website here: https://www.jtlaccounting.com.
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