Top 7 Red Flags in a Construction Company’s Books

Construction businesses operate in a fast-paced, high-risk environment where every project can significantly impact profitability. With tight margins, fluctuating material costs, and complex billing structures, accurate and up-to-date bookkeeping is essential for success. Unfortunately, many construction and trades businesses unknowingly harbor financial red flags in their books—issues that, if left unaddressed, can snowball into major problems.

As a virtual bookkeeper with over 20 years of experience in construction business management, I’ve seen firsthand how these red flags show up and how they can be corrected. Below are the top 7 red flags I look for when reviewing a contractor’s financials.

1. Inconsistent or Negative Cash Flow

Cash flow is the lifeblood of any business, but it’s especially critical in construction where upfront costs are high and payments often lag behind. If your business is frequently scrambling to make payroll or cover material costs, that’s a serious red flag.

Why It Matters:

• It may indicate poor billing practices or inefficient accounts receivable processes.
• Delayed invoicing or failure to follow up on unpaid invoices can wreak havoc on cash flow.

What to Do:

• Implement a consistent invoicing schedule.
• Track aging accounts receivable and follow up regularly.
• Use cash flow forecasting tools to anticipate crunch periods.

2. High or Unexplained Job Costs

Are your job costs consistently higher than estimated? Or worse, do you not know how your actual costs compare to your estimates?

Why It Matters:

• Overruns reduce profit margins and make it difficult to bid competitively.
• Without job costing, you can’t identify which projects are profitable and which are draining your resources.

What to Do:

• Set up job costing in your bookkeeping system.
• Track labor, materials, subcontractors, and overhead by job.
• Review budget vs. actual reports regularly.

3. Unreconciled Bank and Credit Card Accounts

If your bank or credit card accounts haven’t been reconciled in months, your financials are likely inaccurate.

Why It Matters:

• You could be missing fraudulent transactions or duplicate charges.
• Your reports will not reflect true balances, which can lead to poor decision-making.

What to Do:

• Reconcile all accounts monthly.
• Investigate any discrepancies promptly.
• Use accounting software that simplifies bank feeds and reconciliation.

4. Payroll Issues or Errors

Construction payroll can get complicated fast, especially with multiple job sites, prevailing wage requirements, and varying pay rates.

Why It Matters:

• Payroll mistakes can lead to IRS penalties and unhappy employees.
• Labor costs are a major component of job costing and must be accurate.

What to Do:

• Use payroll software designed for construction (or outsource to someone who does).
• Track labor by job and ensure taxes and benefits are calculated correctly.
• Review payroll reports each pay period.

5. Outdated Accounts Receivable or Payable

A/R and A/P aging reports tell the story of your financial health. If you’re carrying lots of unpaid invoices or overdue bills, you’re asking for trouble.

Why It Matters:

• It may indicate poor follow-up or a lack of systems.
• Overdue payables can hurt vendor relationships and lead to supply delays.

What to Do:

• Monitor A/R and A/P aging reports weekly.
• Set clear terms with customers and vendors.
• Automate reminders and establish collection routines.

6. No Work-in-Progress (WIP) Reporting

If your business operates on long-term projects and you’re not using WIP reports, you could be misrepresenting revenue.

Why It Matters:

• WIP reporting helps match revenue with the percentage of work completed.
• It’s essential for accurate financial statements and estimating profitability.

What to Do:

• Implement a system for tracking project completion.
• Use WIP schedules to adjust revenue and cost recognition.
• Review monthly to keep your books aligned with your progress.

7. No CleanUp or Review of Prior Year Books

Year after year, many businesses roll over messy books, assuming their CPA will sort it out at tax time. This is a costly mistake.

Why It Matters:

• Errors compound and become harder to fix later.
• It can lead to overpaying (or underpaying) taxes, penalties, and missed deductions.

What to Do:

• Conduct an annual diagnostic review.
• Clean up prior-year transactions and adjust balances.
• Maintain a bookkeeping calendar with key tasks and deadlines.

Final Thoughts: Prevention Is Easier Than Repair

Financial issues rarely fix themselves. If you recognize one or more of these red flags in your own business, now is the time to act. At JL Bookkeeping Design, we specialize in helping construction and trades businesses clean up their books, implement better systems, and regain control of their financial future.

Whether you’re dealing with a few inconsistencies or a complete mess, a virtual bookkeeper who understands your industry can help you turn things around. Don’t wait for an audit or cash flow crisis to discover what’s been hiding in your books.

Need a Diagnostic Review? Let’s take a look under the hood. Contact JL Bookkeeping Design today for a free consultation and find out if your business is as financially sound as you think.