FEATURE ARTICLE, OCTOBER 2007

CONSTRUCTION ACCOUNTING
Improving financial management will help contractors survive in a tighter market.
Russ Panks, CCFP

Last year, a substantial developer invited all of its suppliers to a meeting because market conditions were tightening. The developer needed a price cut to compete. After some discussion, the suppliers all agreed to cut prices by 2 percent, so they could retain the business.

This year that same developer — with no meeting or negotiations — demanded a price cut of 8 percent.

As the market tightens, many contractors find themselves reflecting on the dynamics of the recent boom. When demand was at its peak, many contractors hired inferior labor at inflated wages, just to get bodies. When concrete and steel prices soared, there was no room for negotiation — they paid the prices because the materials were essential. Subcontractors could command any price, and the generals had to pay.

The good times had no end in sight. It was a time to buy flashy trucks, boats and airplanes. It was a time to invest in real estate. Growth was swift and the money rolled in, with more jobs, bigger projects and higher bids. Small businesses were suddenly big operations. There was more equipment to buy or lease; more employees to find, manage, and pay; more materials to source, price and procure; more jobs to bid, track, bill and collect.

Some firms grew so fast that things became a little out of control. But who had the time to think about improving management systems or procedures?

Now the big developers have put on the brakes. Contractors are left holding agreements for contracts they’ve prepared for with equipment, labor and even materials, that may never come to fruition. Many are having cash flow problems; some have land on their books that needs to be written down as values drop. To survive as the market tightens, contractors must improve their financial management. Consider the following six questions.

Cash Flow

How’s your cash flow? Billing and collections can be key to survival when times are tough. How much do you have in work-in-progress (WIP) that you haven’t billed? Are suppliers being paid before you’ve gotten paid by your customer? Are you ahead or behind in terms of cash? Simple reports can help you see where cash flow can be improved. Tightening billing and collection procedures can make a world of difference.

Costs

Do you understand your costs? Job costing is one area where most contractors lack the information they need to manage. Each job should begin with a budget, with cost codes and sub-codes for time and materials. As you complete the project, compare your budget to the actual costs. Where are you exceeding your budget? Where are your actuals lower than you projected? In a more competitive environment, you need to understand your job costs to bid more effectively. There’s little point in winning a job if you’ve priced it below your true costs.

Estimation

Do jobs change from estimate to project management? When you estimate a job, it’s broken into phases. Your budget is based on those phases. To compare your actuals to your budget accurately, you’ll need to track costs in the same phases. Yet, all too often, there is poor communication between the project manager and the estimator. Too frequently, the systems used by the two functions aren’t integrated. So the estimator’s phases and the project manager’s phases are out of sync. This is a common reason why contractors don’t truly understand their costs.

Managing Change Orders 

How do you manage change orders? It seems like common sense — change in a project means change in the costs, and you’ll need to bill and collect for additional expenses. Yet many sub-contractors fail to get approval on change orders from the prime. Subsequently, many general contractors fail to get approval from the developer. The contract amount doesn’t get changed. So the cost side comes through but the revenue does not. Addressing changes in a timely manner and instituting solid approval procedures can improve the odds of getting paid, and, ultimately, improve your financial performance.

Proper Software

Do you have the right accounting system and procedures? The idea of improving job costing, change order management and project management may have caused you some anxiety. If you’re like most contractors, you may not have the data or the financial management tools to act on these recommendations.

If you’re like many of your peers, as you grew more successful you saw the need for systems to improve efficiency and to solve a variety of problems. The company may have launched with a general business package that helped manage payroll, accounts payable, accounts receivable and general ledger — perhaps a package recommended by a friend or relative who used it in his own retail or service business.

As growth accelerated and more opportunities arose, you may have chosen to add an estimating system, or a scheduling, project management or equipment management system to keep things under control.

In most cases, different elements were purchased at different times, and often not from the same software company. They’re not integrated. So the job estimate on Bob’s desktop needs to be entered from scratch into Suzie’s project management system, and the data about payroll, leases or materials costs keyed separately to another program. What’s the result? A patchwork of data that doesn’t provide the reporting you need to understand and improve business performance.

Even though it seems like a tough time for an investment, a new system pays off rapidly by improving cash flow, increasing the ability to collect on change orders, and helping you bid more effectively. To find the system that’s right for your business, follow these guidelines:

1. Don’t mix and match — the systems won’t talk to each other. Integration is key. Time and money are wasted when data needs to be re-keyed. Accuracy is lost and errors result. Tracking jobs seamlessly from bid to collections can improve efficiency, provide valuable information for future estimating and increase realization.

2. Don’t be cheap. True construction accounting packages can save money in unanticipated ways. For example, a good package will track the expiration dates of your subcontractors’ workers compensation policies and prompt you to ask them for proof of renewal. If you fail to do so and you’re audited by your insurance company, you could be charged.

3. Ask someone that knows your business. Your brother-in-law that is an attorney doesn’t have a broad range of experience with managing a construction company. So, while the software package he recommends might work perfectly for his law firm, it may not be the right choice for your company. And even the recommendation of one of your peers only reflects one firm’s experience. Ask someone with broad industry experience, like your accountant, which software packages work best for companies of your size and profile.

While it’s difficult to see how this changing environment will affect contractors in the long term, a decision to improve the financial management of your company is a sound step for survival and continued prosperity, far into the future.

Russ Panks is a CPA who specializes in construction and real estate accounting for Kaufman, Rossin & Co, one of the largest accounting firms in Florida.


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