The Value of Construction-Based Accounting


The Value of a Construction-Based Accounting System

By: Dennis Stejskal,
Vice President of Product Management at Sage Construction and Real Estate

Construction projects are complex webs of moving parts: equipment and material, labor and management, contracts and time schedules. Everything has to be counted, coordinated, managed and tracked so that nothing slips through the cracks and all deadlines are met. And contractors, designers, subcontractors and workers must keep the lines of communication open to ensure successful completion of any construction project

Since employees and subcontractors are paid according to the percentage of the total work they do, their hours must be tracked accurately. Equipment depreciation needs to be assigned based on the project allocation for each specific tool. Being able to account for all of these moving parts in a big construction project is crucial – especially if the construction firm encounters a legal issue. Having a construction-specific accounting solution that provides detailed job costing and increased business visibility can help alleviate many of the risks construction firms face and, at the same time, enable them to more effectively plan for the future. 

Properly archived project costs are important -- not just for accounting and filing reports in the present, but for using as a reference in the future. Breaking down material costs, material usage and labor costs can help improve a company's bidding process. This allows the company to secure more profitable work, avoid troublesome jobs, and identify inherent inefficiencies. What is the end result of having a clear understanding of the potential breakdown of labor hours, material and equipment usage and overhead? It gives the contractor the information he needs to develop estimates that will fall within the budget of the project, and to be a competitive bidder. And that’s the bottom line for profit.

Construction industry-specific accounting software gives architects, contractors and engineers the tools to create detailed job costing. It enables a company to properly analyze its operations in easy-to-understand terms. It can provide cost statements by job code, labor hours, or material use to give your company a clear picture of the overall profitability of any project. It can also help you quickly identify potential shortcomings. This information can even be provided in real time to help you identify overruns and problem areas while they’re occurring.

Programs that combine accounting, estimating and project management tasks may be especially helpful in monitoring the details of a construction project. Typically, the software creates a complete business management system that allows companies to analyze their workflow, overhead and task allocation. These programs enable firms to streamline recording procedures and share information between departments, enhancing business decisions by creating targeted reports and forecasts that aid decision-making.

The best program is one that will accurately account for material, labor, and equipment costs, as well as administrative expenses, and also link accounting software with other essential business programs -- such as tax forms and project reports. Integrated systems can lead to time savings and more accurate estimates, as the cost information can be quickly and easily shared and acted upon in a timely manner.

Construction accounting software can accurately track expenses across all sections of large projects. Finding inefficiencies or identifying potential problems can help control cost overruns, and are key to measuring variations over the course of a project. The more accurate the accounting of these costs, the better the firm will be able to anticipate and adjust for potential delays or problems. With these integrated systems, departments can align short-term objectives to smooth the management of material deliveries, specialized skills or equipment to correlate with actual work flow.

With most construction accounting software, project information is immediately available to anyone at any time. Interactive inquiries can allow employees to view information—such as potential cost overruns, percent complete, and production units in place—on the screen in seconds. Customizable reports let you calculate and print information in any format you choose for in-depth project analysis.

Job-cost function can often be customized to handle virtually any level of tracking complexity -- from a simple costing structure with basic job codes and standard cost codes, to a sophisticated structure with multi-sectioned jobs, multi-sectioned cost codes, and multiple cost categories.

Contractors can use a job-cost tool to enter subcontracts and purchase orders directly into the system, or import them from other programs, then track them against invoices for total control over committed costs. It also allows them to manage every step of the change order process—from pending through approval—to ensure change order profitability and avoid potential liability.

Job modifications are very common in the construction industry; it’s an unusual project that completes without at least a few change orders. Unforeseen problems and revisions to design, material or budget can all impact the successful resolution of the project and its contract. Having an integrated system in place is invaluable when dealing with change orders. Each change involves a cost. Job-cost accounting software keeps track of the timing of the change order, the cost estimate for the change, the scope and extent of the change, and the person approving the change.

Construction accounting software allows a contractor to enter details about the change order— such as job ID, change order number, and change order date – and then enter the change to estimated units, expenses, and revenues. The change order can then be approved in the system, which would subsequently update the total job estimates. Having a clear record of all changes and their progress that can be shared across the company is invaluable, especially when the number of changes is a high one.  This is the best solution to keeping a project moving and alerting to potential problems before it’s too late.

Construction-specific accounting software provides contractors with the tools they  need to manage their business more effectively. Contractors can’t afford to deal with situations and challenges in a reactive manner any longer. They must contain costs, reduce risk, and keep projects moving by acting immediately at every decision point. To do this effectively, they need clear visibility into the people, processes, and intricate details of the projects that drive their business and steer their decisions. Using construction-specific accounting software on a daily basis allows them to manage and control all these elements.

There are five types of business visibility a construction firm should have in place in order to obtain the full picture:

Reporting: Many contractors have some form of reporting they follow. Unfortunately, while the information works in the present, it doesn’t have the detail or accuracy that allows them to make informed decisions in the future. Ideally, a good job costing system offers access to historical data for reports and financial statements going forward.

Monitoring: By using key performance indicators, dashboards, and automated alerts to track major risk areas, a contractor can learn what’s happening right now and act quickly to make changes.

Analyzing: Analytic capabilities help to assess a company’s performance as well as plan its business strategy. Using business analytics gives companies the understanding of why things happen, the ability to truly shape their company’s vision, and the knowledge to make continuous improvements.
Predicting: No one has a crystal ball, but the ability to spot trends and forecast costs gives you an advantage that could be critical to ensuring project profitability. Forecasts also help develop budgets, establish a vision for the future, identify potential problems, and create benchmarks to measure and reward performance.  When forecasting, it’s most helpful to plan for the best but prepare for the worst.

Mobilizing: Contractors can access data using mobile devices so they can make informed decisions even while in the field or on site. The use of mobile devices on the construction site is exploding. These smart devices are no longer merely mobile phones, but have the ability to connect to software applications now available in the Cloud. As a result, field management can access and submit project reports, view plans, and capture and approve hours worked – all from their smartphones and tablets.

Pairing construction software and other available technology with increased business visibility improves decision making, and allows for quick course corrections to keep projects on schedule. This flexibility helps secure adequate bonding and funding, prevents profit erosion, and reduces accidents and risk. Construction firms remain compliant and on track so they can focus on completing projects and growing their business.

About the Author:

Dennis Stejskal has over 30 years of experience developing, supporting and selling software and technology to construction and real estate companies. His comprehensive product knowledge and understanding of customer and market needs propelled him into his current role as Vice President of Product Management for Sage Construction and Real Estate.

Dennis has been a member and co-chair on the CFMA Technology Committee and often speaks at industry events, including CFMA, AGC and NAHB meetings and conferences. Dennis graduated from the business school at the University of Wisconsin, Madison.

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