Download
this construction software article
|
 |
| |
 |
See why contractors use FOUNDATION as their construction accounting software!
(click here) |
|
 |
|
| |
 |
| |
|
Financial Reporting Capabilities of Construction Accounting Software
The right software fit means a program that meets accounting and bookkeeping needs and helps run the business
BY FRED ODE
Zeroing in on the appropriate accounting software for construction clients can be a daunting task, even for the most seasoned CPA professional. Why? Because recommending a solution that will meet the contractor's accounting and bookkeeping needs is just one part of the equation. The real challenge lies in finding the right technology to help construction companies run their businesses.
Too often, construction accounting packages are chosen for the wrong reasons, and sometimes by the wrong people. Contractors with little or no accounting background may select a program based on a friend's recommendation, giving no thought to construction-specific issues such as progress billing, percent complete reporting, and job costing. A CPA advisor, on the other hand, may select a program for a client because it's the application the CPA is most familiar with. And while the program may provide easy access to detailed general ledger transaction history and aging reports, the contractor struggles to update progress billings, track change orders and process payroll.
Reporting is key
The primary objective of an accounting system, according to one respected text, is to "summarize transactional data into useful management reports that manage the business." Construction companies, which require a significant amount of data collection, processing and interpretation, are therefore extremely dependent on their accounting system for accurate and timely reporting.
Day to day, week to week, month in and month out, construction owners need to know their numbers in order to survive in the long term. Consider the facts. From 1990 to 1998, more than 10,000 construction firms failed, representing 13% of total U.S. failures. And according to Dunn & Bradstreet Corporation, only 26% of newly-established construction companies will be in business after ten years. Why the huge failure rate? According to a 2000 study titled, "Business Failure in the Construction Industry," budgetary and macroeconomic issues represent 83% of the reasons for construction company failure.
It's not as though contractors are unaware of the challenges. A 2006 survey of more than 1,200 North American construction presidents and/or CEOs revealed that financial concerns—including high cost of capital, profit margins and cash flow—rank high on the list of serious problems for contractors. Nevertheless, while a clear understanding of company financials appears to be a top priority, a great many contractors have no idea how this can be accomplished.
If, as the saying goes, cash is the lifeblood of the construction firm (and accounting is its heart), then financial reporting surely must be the brain that keeps it all pumping smoothly. Contracting companies both large and small need to regularly perform financial reporting on two levels in order to monitor and manage the overall health of their company. It becomes the job of the accounting system, therefore, to produce both Executive-Level Reports and Project-Level Reports to help construction owners and executives run their business.
Executive-level reports
Executive-level reports have the ability to provide a bird's eye view of just how well (or poorly) a contractor is doing. Unfortunately, in the construction situation, many high-level reports are often produced solely for the bank, the surety company, or the accountant at tax or audit time. Lacking a real understanding of what these reports can provide—as well as the know-how to produce accurate reporting—many contractors live in financial limbo, never really knowing how the company is performing—until it's too late.
Obviously, construction owners and executives should review and understand their company's income statement and balance sheet on a regular basis. But in addition to that, the complex nature of construction requires that management turn to job-specific summary reports (for example, one-line-per-job reports) to help them manage their business. At a minimum, construction owners need to understand and regularly review these four key, executive-level reports: Gross Profit by Job, Job Overhead Allocation, Over/Under Billing (a.k.a. Work in Progress, Percent/Complete), and Cash Flow by Job. Equally important, each one of these reports should be easily accessible— in one format or another—from the contractor's own accounting system.
Gross profit report by job. No matter what type of accounting application is in use (including manual or spreadsheet applications), contractors should have the ability, at any point in time, to produce a gross profit report by job. This report is a corner-piece of the financial puzzle. It provides a broad overview of the profitability of each job by listing total contract sales less direct job costs.
With just a glance, contractors can tell how their jobs are doing in terms of gross profit. Unfortunately, this report only takes direct costs into account and does not address such issues as overhead allocation and over/under billing. Far too many contractors view this report as the only measure of their degree of financial success on each job.
Job overhead allocation. Of the more than 700,000 U.S. construction firms operating today, only a slim minority perform overhead allocation as part of their accounting procedures. And of those that do, it's anyone's guess how many actually perform it correctly. With the help of an accounting professional, contractors can select the best method for their business among the many possible methods for distributing non-direct expenses to their jobs. Once a method is selected, however, technology (in the form of construction-specific accounting software) can automate this all-important task to provide owners with a highly accurate picture of profits.
Using a pre-calculated method that is based on labor hours, this overhead allocation report allows management to see the true profit/loss from each job, taking into account indirect job expenses. The contractor's accounting software program automatically allocates these costs across jobs with the posting of each transaction, eliminating the need for additional data entry or exporting data into spreadsheets.
Over/under billing. Many contractors hire their accountant to produce Work in Progress reports on an annual basis to meet the requirements of banks and sureties. But just as a construction CPA uses the Work in Progress report to determine a contractor's most current financial position and solvency, the construction owner needs to run his own Over/Under Billing reports on a regular basis.
With each new Over/Under report, the construction owner has the opportunity to address under-billings on a job (which could cause serious cash flow problems), or adjust over-billings (which inflate the company's profits if not accounted for). Construction accounting software applications should be capable of automatically producing this report in a format that can be easily reviewed by management. When reviewed regularly, the Over/Under report can provide management with a more accurate measure of profitability as well as alert them to problem jobs while there is still time to make corrections.
The Over/Under Billing Report allows the contractor to immediately recognize over/under billings and gain a more precise measure of profitability. Using an integrated job costing system, this report allows for the automatic adjustment of the company's income statement so that profits are not over or under inflated.
Cash flow by job. Because cash is king for every construction company, common business practices call for owners to commit regular cash flow reporting—on a monthly, weekly, or even daily basis, is possible. Furthermore, it is important to look at cash flow per job (not just on a company-wide basis) because it helps pinpoint exactly where the drain should be plugged. Once the work of cash flow projections has been completed during the estimating and scheduling phases, monitoring cash in and cash out for each job is simple with the use of a good construction-specific accounting package.
This sample cash flow report shows the exact net cash flow for all current jobs, including net cash flow percent to billings. It gives management the ability to quickly determine is the company has the financial resources and lines of credit available to handle the anticipated work volume.
Project-level reports
At the project level, construction-specific accounting systems are also highly capable of transforming job cost data into essential reports that answer the how, why, where and when details of every job. These reports provide a narrower focus than Executive-Level Reports to help owners and managers: 1) identify where the job stands today, 2) predict where the job is headed, and 3) create a database of history, that contractors can use for future bidding, evaluation of jobs and better decision making. Equally important, these reports help project managers stay on track and stay accountable throughout the life of the project.
There are probably as many different project-level reports as there are unique construction companies. Electrical contractors, for example, may want to run significantly different project-level reports than heavy highway or excavating contractors. The type of work a contractor does—and length of the projects—all affect the type of reporting needed.
Regardless of the type of report needed, it is vital that a contractor use construction-specific software to produce them. While many accounting software applications will provide the ability to break down original budgeted, committed and actual costs by cost categories (a.k.a. phases, cost codes, cost classes, etc.), the right software for contractors will go much further. First, it must maintain and report both the original and revised budget figures (original budget plus change orders), something off-the-shelf packages don't always handle. Even more importantly, the accounting and job costing must be fully integrated, meaning that the system should require the entry of job cost data wherever relevant. For example, all Accounts Payable transactions should require the entry of a job and allow breakdowns of cost categories; payroll and labor burden should automatically be distributed to the proper job cost categories. Income should be attributed to a specific job, and, if desired, cost categories. When this information is fully integrated, users not only are more efficient, the reports provided by the software are more accurate and complete.
In addition, a contractor's job costing system should have the capability of running reports the way each contractor— or project manager—wants to see them. The system should also offer not just standard reports, but customizable report writers that can create an infinite combination of reports, capable of showing cost breakdowns on many levels—from total job costs to labor costs per task, to costs per cost category, to costs per units of measure, etc. And while it is certainly possible to create and maintain a manual job costing system (and then dump this information into spreadsheets for project-level reports), it would not be easy or efficient for a contractor to do so.
When selecting a system and designing project-level reports, a CPA advisor should weigh heavily the types of jobs the contractor performs to create the most useful reports. For example, unit-based performance reporting may be important to a heavy highway contractor who needs to track productivity by the foot or yard, whereas material-based quantity tracking might be more important to an inventory-heavy electrical contractor. Regardless of the trade, however, the reports should contain enough detail and be timely enough for managers to recognize problems with productivity, cash flow or estimating as they are occurring on the job.
What follows is a random sampling of project-level reports that a mid-size heavy highway contractor might require to stay on top of current jobs. Such reports should be simple to run with the help of a flexible (and user-defined) job cost construction accounting system.
Evaluating a contractor's real need
Not every contractor has the people and processes in place to take advantage of reporting capabilities available within today's sophisticated construction-accounting systems. And not every contractor has the number knowledge of financial management commitment to make switching software applications feasible or even worthwhile.
CPA consultants must evaluate the contractor's real needs and ask some hard questions: Is the contractor's current accounting system meeting his financial reporting needs? If not, are contractors ready and willing to produce financial reports on a regular basis? Are they ready and willing to put processes in place to collect accurate job cost data in a timely manner? Do they have people in place capable of customizing and analyzing financial reports?
Obviously, when evaluating construction accounting software products there are other important issues to consider beyond the system's reporting capabilities. The specific needs and the unique qualities of the organization must be considered as well. For example, along with tracking job costs, a service-oriented contractor might also have requirements that include service dispatch, warranty and service maintenance. In contrast, a heavy equipment contractor may require a system that can track equipment usage by job, while a large general contractor might need an accounting package that can manage subcontracts as well as scheduling and document control.
As with all technology purchases, there are always trade-offs when attempting to select a perfect fit construction accounting solution. An extremely low learning curve, for instance, may have to be sacrificed for flexibility and greater reporting capabilities. Or a larger up-front investment might be required to achieve higher efficiency and productivity down the line.
Conclusion; bridging the gap
The construction industry's notorious underutilization of technology is steadily changing. Construction business, reacting to a combination of persistent competition, rising costs and a favorable economic outlook, are looking to technical solutions to help improve efficiencies and over financial management. According to CFMA's 2006 Construction Industry Financial Survey, 50% of respondents plan to leverage technology as a key strategy to improving profitability in 2007.
Reporting capability and flexibility are perhaps the most valuable aspects of any construction accounting software program. Numbers are virtually useless unless they can be placed in a format, or report, that explains their meaning. And even though accounting software can't prevent "garbage-in, garbage-out" data processing mistakes a properly designed application sure can make life easier for the contractor intent on running a financially sound business.
Fred Ode is founder and Chairman/CEO of Foundation Software, Inc., of Brunswick, Ohio. He started the company in 1985 after spending several years developing customized software systems for the construction market. He has managed the growth and development of the company from start-up to leading supplier of construction accounting software. |
