Why Updating Project Budgets Matters Under GAAP (and Why Project Managers Should Care)

In construction, project budgets are more than planning tools—they are the foundation for how revenue and profit are reported under Generally Accepted Accounting Principles (GAAP). When budgets are not kept current, financial statements can be wrong, even if the work in the field is being managed well. Keeping budgets current is also important for avoiding surprises in project margins.

Under GAAP, most long-term construction projects recognize revenue based on progress toward completion. In simple terms, the company reports revenue and profit based on how much of the job is complete. That completion percentage is usually driven by costs incurred compared to total expected costs. If the total budget is outdated, the reported progress is wrong, and the impact could be significant

For project managers, this means that old budgets can make a job look better or worse than it really is. If expected costs increase but the budget isn’t updated, the job may show too much profit early on. These errors eventually have to be corrected, often all at once, because profits were previously overstated, causing unpleasant surprises later in the project.

Updating budgets also ensures losses are recognized when they become known, not when the job is finished. If project estimates indicate a project is expected to lose money, that loss must be recorded. Timely budget updates help identify these situations early, which can give management time to respond while maintaining compliance with external (or internal requirements). Up-to-date budgets also improve credibility with lenders and bonding companies.

Accurate budgets are also essential for forecasting remaining costs. From an accounting standpoint, “cost to complete” drives revenue recognition and profit fade/gain. From a project management standpoint, it reflects how realistic the plan is to finish the job. When budgets reflect current conditions, such as change orders, productivity trends, and material pricing, the financial statements align with what is actually happening in the field.

Finally, financial statements that consistently reflect real performance reduce questions during audits and reviews. Updated budgets improve job-to-date and cost-to-complete accuracy, which supports reliable work-in-progress (WIP) reporting. WIP schedules are closely reviewed by auditors and third parties, so accurate budgets help make WIP reports understandable, defensible, and realistic. For project managers, this means fewer accounting fire drills and less time explaining numbers that don’t match job reality.

As an example, a project has a $2,000,000 contract with an original $1,400,000 cost budget. $700,000 of costs have been incurred. Later, the project team determines that due to design changes, labor overruns, and material increases, the total expected cost is actually $1,900,000, but the budget is not updated. Until it is, the financials don’t reflect the true scope or cost of the work.

Under GAAP, revenue must be based on the current contract value and current cost expectations. In this example revenue is overstated by $260,000 and must be corrected. Updating the budget when change orders are approved or cost expectations fluctuate keeps reporting accurate while ensuring the financial results tell the same story as the job site and helps to avoid sudden swings in revenue or profit later in the project. When budgets stay current, accounting and project management stay aligned.

Suttle & Stalnaker, PLLC is ready to help you. If you would like more information on how this applies to you, contact our Chris Lambert, CPA, CGMA, CCIFP cslambert@suttlecpas.com or at 304.343.4126.