Scrutton Bland Property Newsletter Summer 2017

Project accounting – beware of black holes

What’s in the black hole? As a property development business expands, so the allocation of costs becomes an increasingly important factor in its success. Without an adequate system in place to accurately record costs, it will be almost impossible to assess the profitability of individual projects. For example, where a project has multiple properties within it, it is often not until the final property is completed and sold that any accounting black holes are revealed. While the contents of these black holes can be good or bad news depending on how successful the project has been, what is inevitable is that exposing these black holes will relieve the element of financial uncertainty that may have been building up for months or even years. Accounting black holes are best avoided. By putting appropriate accounting systems in place to allocate costs specifically to each individual part of a project, nasty surprises can be avoided. By way of an example, where a number of properties are being developed at the same time, as each property is sold the appropriate level of costs should be recognised against the sold property. At each period end, the costs being carried forward as work-in-progress should then represent costs incurred on properties that are yet to be sold.

Navigating the black hole Whatever accounting system you are using, be it a basic accounting package or a more sophisticated cloud based system such as Scrutton Bland offer in SBLive, the important point is to ensure that every cost is allocated to the relevant project. Where single suppliers cover a multitude of projects, such as professional fees or landscaping costs for example, it is important that these are proportionately split over the number of projects they cover.

Why bother? It sounds obvious, but without an appropriate allocation of costs you will never know how profitable each of your projects has been. Not only is this critical in ensuring the profitability of your business as whole, but accurate recording is crucial to ensuring that you are managing liabilities such as tax correctly. If you need advice on dealing with any aspect of managing accounts for property or construction projects including how to deal with work- in-progress Scrutton Bland have a specialist team of accounting and tax advisers who can help. For further information contact Mark Smith, Head of Internal Audit and Senior Corporate Services Manager mark.smith@scruttonbland. co.uk or tel 01473 267028 .

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