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Key Internal Controls for Contractors

The construction industry is a risky one. While contractors can’t do much about economic ups and downs, they can make sure their companies have strong internal controls to help guard against business risks.  In an uncertain environment, well-run companies that have strong controls in place are more likely to gain the confidence of sureties, lenders, and customers/owners. There are several important construction-specific areas you should focus on.

Estimating and Bidding Controls

Without reliable estimates, it is difficult to bid properly or decide whether a job is worth doing. You should have an established process in place for estimating and bidding. Assign a manager to review the estimates based on each project’s specifications and plans.   There should be adequate documentation supporting the estimated costs for materials and labor, such as vendor price quotes and payroll data. Additionally, labor burden percentages should be checked to ensure they are adequate.  Designate a senior person to verify the clerical accuracy of final contract estimates. All bids should be approved by management before they are submitted.

Project Monitoring Controls

Hitting profit targets on each project is generally dependent on the efficient management of the actual construction process. Efficient management requires that you have controls in place to monitor results on an ongoing basis. To do this, you will need job progress reports that outline the actual costs incurred on a job and the projected costs to complete it.

Changes in Work Scope and Conditions

Changes are part and parcel of the contracting business. How well you monitor and manage them can determine whether a project makes or loses money.  There are steps you can take to identify and control changes that may occur during the course of a job. For starters, make sure your on-site supervisors are aware of what is and is not included in the contract. Whenever customers want changes made after the job has started, your supervisors should follow pre-established procedures to first get the changes approved and then to make sure the changes will be billed. Have written, signed change orders before any additional work is begun.

Fraud and Theft Controls

Without adequate internal controls, you have an increased chance of falling victim to theft and fraud. To limit the potential for losses, have estimators obtain more than a single quote and require management authorization of job site material purchases. In addition, set limits on the amounts site managers can spend without an additional, higher level of management authorization.  Require employees to check delivery receipts to ensure that all ordered items have been received, have procedures for managing purchased materials on the job site, and periodically verify materials inventories. You will also want to keep a log of small tools and equipment used on site and the individuals responsible for them. Emphasize proper job site security and hold employees accountable for following established security procedures.

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