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Critical attributes for construction accounting software

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Critical attributes for construction accounting software

What attributes should every construction accounting software have?

There are many quality accounting and ERP software packages available today.  Yet even with their extensive functionality, many struggle to properly handle the financial transactions and procedures of construction companies.  Most who work in these areas would be familiar with the variety of spreadsheets, manual processes and work-arounds needed to perform their routine tasks.  Despite people’s best efforts this limits their productivity and too often leads to inaccurate information, which can seriously affect the profitability of a project.

Accounting in building and construction is not only about transaction processing.  It also involves detailed cost projections and records which occur prior, during and post execution of the contract. To manage this efficiently requires software specifically designed to facilitate these processes in a simple, logical manner. So let’s have a look at some of the critical functions that are required for a construction accounting solution.

1. Estimating and Job Cost

This should be the core of any system being run by a construction business. Accurate estimating and controlling your project costs is how you make money. Whether your projects are large-scale commercial developments, civil works, subcontracted trades or building houses they all begin with an estimation of costs.  These are made up of granular budgets across all aspects of the project with various cost categories or cost codes. 

Upon commencement of that project as the costs roll in, they need to be easily identified and applied to these categories so they can be measured against the budgets.  While this may sound obvious it’s a key area that non-specialised construction systems struggle with. Timely, accurate information on job cost greatly reduces the risk of budget blow outs.  Job costing through a construction accounting system will help you with:

  • Original estimations based on user, or traditionally applied cost category tasking
  • Actual versus estimate cost comparisons
  • Tracking commitments (purchase orders and Subcontracts)
  • Labour hours and material tracking
  • Capturing the cost of variations
  • Original and Current budgets with comparisons
  • Tracking of budget changes
  • Cost category management
  • Calculations of gross/net revenue and percentage complete
  • Applied calculations associated with cost-of-sales and earned revenue estimations

2. Detailed accounting

Along with the typical functions of GL, AR and AP, construction accounting also requires a more detailed approach to financial management. These functions include:

  • Contracts administration
  • Materials management
  • Equipment management
  • Time and billing
  • Progress claims/payments
  • Internal compliance management
  • Vendor Compliance
  • Purchasing and Variation management

3. Integrated payroll

Payroll in the construction industry can throw up variables that standard payroll system.  Its more than calculating hours based on an award.  Specific functions here include:

  • Real-time payroll processing
  • Labour costing and summary analysis linked with job cost
  • Unit cost and productivity reports
  • Variable rates of pay by project, job type
  • Direct labour cost control reports
  • Multiple allowances by job type/project/location
  • Insurances
  • Taxable Payments reporting
  • FTE histories and background investigations
  • Union requirements
  • State/Federal compliance Multi-project capable
  • Multi-project Payment capable
  • On-demand project cost/revenue consolidations    

4. Comprehensive financial reporting

As Construction ERP is primarily driven by project, rather than more traditional business principles, these specialised systems provide enhanced financial reporting in that context.  Construction ERP systems require both broader and deeper views of operations on a financial level, which include:

  • Resource utilisation analysis
  • Multi-company, multi-division, multi-project
  • Project related cash flow management
  • P&L by division, location, job type or project manager
  • Balance sheet management by project/commercial entity

5. Equipment cost management

Very similar to Job Cost it is very important for construction companies utilising their own equipment to manage cost in relation to these items.  In this case, construction ERP systems should also manage and account for equipment ranging from specialised tools and machinery to the operation of heavy-equipment assets such as excavators, trucks, dozers etc. , ensuring that it is costed to jobs correctly and billed accordingly.

6. Full Integration

One true source of information. This should be the mantra for any construction business.  Everything is in one place where you can quickly check, analyse and make informed decisions from. A fully integrated solution means you can trust the data from it. 

Integration also serves to streamline the work flows.  Some examples are:

  • A single time sheet entry for a machine operator can simultaneously update job cost, payroll and equipment cost. 
  • Approval of a variation can automatically issue a purchase order to the sub-contractor with the value reflected in the commitments in the Job Cost Report.
  • A supplier’s invoice can be easily matched up against purchase orders and material receipts to enable fast data entry and approvals.

These are just a few examples where an integrated system improves efficiency and productivity of the administrative side of construction projects.  Proper integration eliminates double entry, reduces errors and greatly improves accuracy of Information while reducing time spent in front of the computer screen.

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