Thought Leaders: How necessary are internal controls for contractors?
Think of it as the difference between black and red.
Companies that rely on proven internal controls best practices are more likely to operate in the black. Construction companies that have limited controls are ripe for fraud, inefficiencies and noncompliance – and are more inclined to bleed red.
Internal controls can safeguard your organization from theft, misappropriated funds and cyberattacks. They can streamline operations by ensuring everyone is working from the same plan using the same procedures in support of the same goal.
Information technology should conduct regular reviews of user access rights and have a digital wall between those who handle cash and those who oversee billing. Processes and procedures should protect against business interruption from system failure or cyber criminals with a layered security approach.
Estimating and bidding with a quality control check is one of the easiest controls to implement. Establishing an independent review of initial bid packages will reduce the chance for surprises down the road.
Contract costs processes should be protected by guardrails. Ensuring that ordering, purchasing, receiving and approval processes are segregated among multiple people is key to preventing fraud and other loss.
Project administration internal controls should support consistent communication and management oversight and can curtail decision-making without proper authorization.
Billings and collections separation between functions is a critical component. Segregating invoicing from cash disbursement and billing from cash receipt processes can reduce cash-type fraud. Timely billing will keep cash flow predictable.
Revenue recognition and general accounting controls can promote consistent and on-time reconciliation and close of project books. Control updates on incurred costs, contract value, and estimated margins should be documented for future estimates on projects.
Not sure how effective your controls really are? Wipfli’s team brings demonstrated experience with supporting construction firms of all sizes.
