Internal Control Best Practices for Construction Companies

Denver area construction companies have benefitted from the recent increase in development and re-development across downtown and the region. According to the Downtown Denver Partnership, since 2013 there has been over $5 billion in construction investment which represents over 83 new projects since in downtown Denver alone. This increased level of investment has opened the door to new opportunities and challenges for industry companies. New projects mean new business opportunities for developers and subcontractors. It has also created a labor shortage and accelerated the adaption of technology to control costs. A less discussed issue created by these changes is the need to regularly review and enhance your internal controls policy. As growth continues, Colorado construction companies need to review these systems to ensure best practices are followed. To help clients, prospects and others, Hanson & Co. has provided a summary of internal control best practices.

What are Internal Controls?

They are set of rules and policies designed to ensure the integrity of financial and accounting information, promote accountability for employees, vendors, suppliers and subcontractors, and prevent fraud from occurring. According to Construction Business Owner, the most common types of construction fraud include falsifying payment applications, billing for unperformed work, manipulating change orders, substituting material, stealing tools and materials and making false representations. A robust internal control policy in key areas of the business can ensure the maximum amount of protection possible.

Internal Control Best Practices

Below is a list of suggested internal controls by area, including:

Purchasing

  • Require that estimators receive more than one quote for services or materials.

  • Ensure management reviews and authorizes all job site material purchases.

  • Implement strict limits on the amount that managers can spend without receiving additional approval from managers.

  • Make it a standard practice for managers to carefully review and validate that all ordered materials and supplies have been received. This will protect the company from being shorted on orders.

Cash + Billing

  • Require proper invoice approval for all purchases made for a job.

  • It’s important to require dual signature on checks over a certain amount to reduce the opportunity for improper payments to be made.

  • Limit the number of individuals with signatory authority on check signing. The higher the limit the higher the position the individual should have in the company.

  • Create a rule that prevents billing personnel from performing receivables duties.

  • Discourage yet document when management overrides the internal controls process

Subcontractors

  • Ensure a regular review of invoices, payments and contracted amounts. If there are any variations, it’s important to quickly follow up to identify the reason and ensure its validity.

  • Regularly review original contract costs to invoiced contract costs to determine if there are variations.

  • Conduct an annual review of the subcontractor/supplier bidding process to identify areas of improvement and drive competition.

Payroll

  • Require a non-payroll professional to reconcile the payroll account on a regular basis.

  • Use direct deposit or automated payment systems when possible to reduce the opportunity for dishonest employees to manipulate the system.

  • Require any changes to an employee’s status (contact information, withholding rates, retirement plan contributions, etc.) to be completed in writing and approved by a manager before they are implemented.

  • Conduct regular on-site audits to prevent against fictitious employees from receiving paychecks.

Contact Us

Reviewing and optimizing internal control policies is an essential practice that management must routinely execute. The examples above are general guidelines and may not apply to each company based on their specific structure and business practices. If you have questions about your company’s internal controls process or need assistance with a construction audit or tax issue, Hanson & Co. can help! For additional information please call us at 303-388-1010 or click here to contact us. We look forward to speaking with you soon.

 

Jeremiah Wolcott