Ensure your construction accounting system has the right features
Construction accounting is distinctively complex. Unlike other businesses that rely heavily on a general ledger to track finances, construction companies need to master a project-based approach to accounting. After all, each of your jobs serves as an individual profit center — with its own scope, timeline, payroll, revenue and expenses.
That’s why your accounting software shouldn’t function like any other company’s off-the-shelf solution. Here are some key features to ensure that your system gives you the right functionality.
What separates construction-specific accounting software from general-purpose solutions is the availability of job-costing modules to track costs and revenues by project.
What’s more, your software should be able to track costs by codes, classes and job phases. These functions will empower you and your users to measure actual versus estimated costs in real time to determine which activities are profitable, or at least within budget. You can then adjust as necessary.
You’ll also accumulate a wealth of historical data to identify the most profitable jobs for your company and to generate more accurate bids.
Construction is decentralized. Rather than occurring in a central office or plant, your work is mobile — taking place in the field (estimates) and across different jobsites (work in progress). Company resources, such as equipment and labor, move around according to each job’s needs. Your project managers must track labor at each site and, depending on the job and location, apply prevailing wage rates, union or nonunion pay, multistate deductions, and/or government compliance requirements.
Thus, construction-specific accounting software should support various forms of timecard entry and include automated payroll features such as:
- Payroll reporting,
- Certified payroll,
- Fringe benefits,
- Equal Employment Opportunity Act compliance,
- Workers’ compensation claims tracking, and
- Multistate/locality processing.
Also important: payroll data needs to flow into the software’s general ledger and job-costing modules.
Another significant difference between general-purpose and construction accounting is how billing and invoicing are handled. Some projects can take months or even years to complete, which means you might have to recognize revenue based on percentage of completion rather than a fully executed contract.
For instance, 25% project completion means one-quarter of the contract value is recognized. You need to be able to track such project progress to bill clients accurately and ensure project revenues are recognized appropriately for tax and accounting purposes.
Key software features to help facilitate this include progress-complete invoicing, retainage reporting and cash receipt tracking. Plus, your system should enable users to view sales and use liabilities, sort and monitor change orders, and create and manage purchase orders.
Construction-specific billing methods can vary. Examples include billing based on service, unit price, time and materials (hourly labor rates plus supply costs), as well as American Institute of Architects progress billing. You and your users should be able to choose from these invoice templates as well as lump-sum, itemized and other free-form invoices.
In addition, software that allows users to assign specific billing rates can help generate invoices faster. And batch invoicing is an often invaluable, time-saving feature that generates multiple invoices from a single-entry input, as opposed to manually entering information for each invoice.
In construction, the general ledger and each job-costing module should work together to provide whatever information you need. When data is recorded and organized properly within the system, the result should be actionable reporting from as high as the overall company level down to each job. Be sure your accounting system can generate reports such as:
- Cash flow and income statements for the business as a whole,
- Per-project cash-flow analysis and income statements,
- Over- and underbillings,
- Estimates versus actual costs, and
- Production or project status.
You and your users shouldn’t have to manually create reports from spreadsheets or perform additional entries into a job journal once an invoice or timecard has been submitted.
Compatibility and support
Although your accounting system absolutely needs to be construction-specific, it should have certain things in common with any type of business software.
For starters, make sure it’s compatible with other systems. Manually transferring data from one system to another is a time-consuming and error-prone task. Accounting software that can smoothly integrate with, for example, your construction management software will allow easy and accurate data sharing and processing.
Also, your vendor should provide all the tools and training you’ll need for success. This includes onsite consulting and continued education with each system update or upgrade. Additionally, your provider should offer fast customer service, priority assistance for work-stoppage issues and 24/7-live support. A user community forum is a plus.
Find your must-haves
Your construction accounting software’s must-haves will depend on your company’s size, specialty, job locations and other factors. Re-evaluate your needs regularly to identify necessary upgrades or even whether you need an entirely new system if your business has really grown or changed. Contact your Jones & Roth Business Advisor for help assessing your existing software and finding ways to put it to better use.