Imagine overseeing a construction project where you’re unsure about the cost of materials, labour and other overhead costs. This is where the role of accounting in construction becomes evidently crucial to the project’s success. From tracking costs to ensuring projects stay within budget, a project cannot be successfully completed without accurate accounting data and reporting.
In an industry where cost overruns are common and cash flow can be unpredictable, understanding the nuances of accounting aspects like accounts receivable, indirect costs and the balance sheet is essential to the successful management of your service and construction operations.
Accurate and reliable accounting helps in comparing the actual expenses against the budget, ensuring compliance with regulations and providing timely insights into the financial status of construction projects.
What does accounting in construction management do?
Accounting in construction management serves as the foundation of financial control, ensuring that every element of a project aligns with the set budget. It’s a vital tool for tracking and managing the multitude of costs associated with construction projects, from the smallest bolt to the largest equipment.
Why accurate accounting is important for construction businesses
Not all accounting workflows and processes are effective.
Accounting is the most effective at helping businesses maximize profitability and enhance cash flow when it outputs accurate and timely data. This can only be achieved when the field and back office can exchange and share financial, cost and operational data together in real time through integrated software.
Reduce profit fade
Profit fade – the gradual loss of profits due to unexpected costs and mismanagement – can be mitigated with accurate accounting data. When accounting workflows and processes are streamlined with integrated accounting software, data from the field can flow directly to the back office, making it timelier and more accurate for project managers and stakeholders to review. And as a result, misallocated costs or unexpected expenses can be found and corrected earlier to prevent further profit fade.
Improve cash flow
Accurate accounting is vital for maintaining a healthy cash flow because it involves monitoring client payments, identifying delays and ensuring timely debt collection. This practice helps avoid liquidity issues, enhancing your company’s financial stability.
Accurate accounting enables project managers to monitor project costs and pinpoint opportunities to cut expenses and better allocate budgets. This vigilance helps prevent overspending, ensuring sufficient cash flow is available for ongoing expenses.
Better cash flow predictability
Rigorous bookkeeping addresses the unique challenges and complexities inherent in construction jobs. A major advantage of precise accounting in this sector is the enhancement of cash flow predictability.
Real-time tracking of project expenses allows for effective anticipation and management of cash flow requirements. This is lifesaving because construction projects involve significant funds and extend over long periods.
Improve accuracy on job estimates
When you have reliable accounting workflows and processes to produce accurate accounting and cost data, construction firms can also make better estimates on the dollars, hours and units over the project life cycle.
Errors in estimating can result in either underbilling, leading to profit fade, or overbilling, risking the company’s reputation and financial stability. Streamlined accounting workflows and a history of accurate cost and financial data can help firms improve the accuracy of their estimates, ensuring more reliable projections.
How to successfully implement accurate accounting with integrated construction software
As mentioned earlier, accurate accounting begins with unifying the field and back office operations in real time. By doing so, operational and cost data can be accessed on demand to make timely, informed decisions to improve operational efficiency and maximize profitability on jobs.
One of the most effective ways of unifying your field and back office staff is through integrated construction accounting software.
Invest in integrated construction accounting technology
Construction accounting software offers features catered to the industry, like project-based work and variable changes in costs, making it a smoother process when entering and processing costs.
It also helps in tracking and managing the wide range of construction expenses, from indirect costs like office rentals to direct costs such as labour wages, thereby maintaining accurate records and controlling overspending.
Construction accounting software integrated with your payroll, service operations and project management can produce more accurate data by streamlining workflows and processes between the field and back office, automating approvals and allocations, and reducing errors from double data entry.
Establish and streamline accounting workflows and processes
To streamline accounting workflows and processes, accounting staff can begin by first establishing and documenting their workflows and processes, and then identifying redundancies and opportunities to improve efficiency and data accuracy.
This exercise also serves as a good precursor to purchasing a construction or accounting software solution. By doing so, stakeholders can identify where they wish to see efficiency improved and what processes can be automated to reduce manual intervention.
For example, the process of entering labour hours or daily logs from the field can be streamlined with construction accounting software integrated with the field by eliminating double data entry. Field technicians only have to enter data once (improving the accuracy and timeliness of data) through the software and have that data immediately available for the back office for processing.
Ensure accurate cost allocations
In the field of construction management, maintaining financial health and achieving profitability hinge on accurate cost allocations. Implementing industry-specific accounting practices is key.
To ensure precise cost allocations, businesses should break down each project into categories like labour, materials and equipment, assigning costs to each. If integrated construction accounting software is used, businesses should verify if the software supports accurate cost allocations – for example, if the software has the capability to automatically allocate costs to the right PMA, equipment, general ledger, etc.
Reduce double data entry
Streamlining processes through technology – such as integrating software that unifies estimating, scheduling and invoicing – can significantly reduce errors incurred from double data entry. By doing so, businesses can reduce administrative time spent on verifying and re-entering costs, and rely on more accurate data inputted once.
Embracing automation for approvals or allocations to capturing job expenses and payment processing, also minimizes human error.
Improve communication with the field
Clear financial understanding among project managers and stakeholders is essential to the success and financial health of a construction business. Therefore, it’s important that team members and stakeholders have a centralized platform for communicating daily operations, changes to the project scope or exchanging cost data. Construction software can help.
Documents like accounts payable invoices, videos or RFIs can be stored in the document management system of your integrated software to improve communication exchanged between the teams and with the customer.
Accurate construction accounting as the foundation of building business success
Accounting in construction management transcends mere number crunching. It’s the keystone in building a successful, financially stable construction enterprise. By diligently tracking costs, ensuring regulatory compliance and providing clear financial insights, accounting steers construction projects through the complexities of budgeting, planning and execution.
Businesses that wish to maintain their financial data accuracy and integrity should consider integrated construction accounting software – software that can unify their field and back office operations together in real time. Only when cost and revenue data flow directly from the field to the back office can contractors truly stay apprised of their most recent cost and financial updates and produce accurate, timely reporting to make cost-effective decisions from.
This article was originally published on JonasConstruction.com.
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