Last Updated on April 10, 2024
Imagine overseeing a construction project where you’re unsure about the cost of materials, labor, 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.
In this article, we’ll dive deeper into why accounting in construction management is needed, the role accounting plays in construction management and how to successfully implement accounting into your workflows to produce accurate cost and financial data and reporting.
In this blog:
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 beam. Let’s learn more about the role accounting plays in construction management:
Why Accurate Accounting is Important for Construction Businesses
Now that we’ve discussed the role accounting plays in construction management, it’s evident that accounting is much needed in order to successfully complete construction projects and service contracts.
However, it’s important to note that 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.
With this in mind, let’s dive further into why accurate accounting is important for service and construction businesses:
- 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 more timely and 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 lifecycle.
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. Let’s learn more about this process and other way to implement accurate construction accounting below:
- Invest in Integrated Construction Accounting Technology
Construction accounting software offers features catered for 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 labor 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 and 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 labor 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.
By streamlining accounting processes and workflows, businesses can generate more accurate and timely accounting and cost data. - 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 labor, 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, streamlining these solutions through an integrated solution, 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 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. One of the best ways to do this is through integrated construction software that connects the field and back office together in real time.
Documents like accounts payable invoices, videos, RFIs can also 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.
If you’re interested in learning more about how Jonas’ integrated construction accounting software can support your business needs and concerns, let’s chat!
