What makes construction accounting so different?

Topics: Causeway Project Accounting (CPA), Construction Software
 

Workarounds. That’s how many finance teams deal with the unique accounting demands of construction.

  • Workarounds let construction companies use popular bookkeeping and ERP platforms for most of their needs.
  • The workarounds let them perform construction-specific tasks.
  • Workarounds allow them to create vital reports needed for the construction industry.

While they can do many tasks using standard accounting software, finance departments use workarounds to complete construction-specific processes. And while this is often frustrating, most construction companies choose to compromise.

In many cases, the alternative – building out their own software from scratch – just wouldn’t be worth the time and money. And so, they choose workarounds.

The nature of the industry means that construction accounting is different to accounting in other industries – which makes workarounds a necessity. But why is construction accounting different, and why is a reliance on workarounds risky?

How is construction accounting different?

To see why construction accounting is different, we first need to think how regular accounting works. In most industries – from cafes to car manufacturers to energy providers – production and billing is essentially predictable.

When a business sells a coffee, a car, or an hour of electricity, it simply records the price of that unit, the cost of any input and can use its ledger to quickly calculate of it is making a profit or a loss.

Unlike other industries which have fairly predictable costs and profits, construction is very unusual:

  • Construction is project based and firms bill accordingly. Each project is unique, meaning the costs are never predictable.
  • Things like location, availability of subcontractors, the weather and materials can all affect your profits
    You will be running multiple projects at once, and most of them are long-term – potentially lasting years.
  • Construction accounts receivable tends to bill according to percentage of project completion (which will be affected by supply of materials, weather and other factors).
  • Construction accounts payable is complex – you likely work with multiple subcontractors in many locations who bill in different ways and with different negotiated payment terms.
  • You must factor in retention for completed contracts – the amount the customer holds back until they are satisfied the work is finished. This affects your profit margins and cash flow.
  • Cost-value reconciliation – in order to figure out if you are making money on a project, you must regularly compare your actual expenses with your predicted costs.

These (and many other) factors mean that standard accounting software just does not meet construction industry accounting needs. As a result, you must develop workarounds – usually using spreadsheets – to calculate income and expenses and financial reports.

The problem with construction accounting software workarounds

If you have invested heavily in an ERP or accounting software package, chances are it does most of what you need it to do. From managing accounts payable and accounts receivable to producing financial reports, running payroll and submitting information to HMRC.

So, when it comes to doing construction industry specific tasks – such as cost value reconciliation – you will likely turn to workarounds to patch over the gaps.

Your finance team has likely created several spreadsheets managing things like:

  • Payroll on each of your ongoing projects
  • Job costing
  • Retention
  • Progress billing
  • Tendering
  • Value of customer deposits
  • Rented equipment
  • Estimating
  • And so on and so forth

As and when appropriate, they then manually rekey this information into your accounting software when they are ready to report on it.

These kinds of workarounds are common, but they have some significant drawbacks:

  • Manual input errors

Did you know that 90% of all spreadsheets contain errors? Simple mistakes can mean these spreadsheets contain incorrect data which can affect everything from job costing to financial reports.

  • Time consuming

Moving information from incoming emails and paperwork into your workaround spreadsheets – and then on into your accounting software - is unnecessarily time consuming.

  • Overly reliant on individual knowledge

Many construction accounting workarounds rely on one or two individuals’ knowledge of complex accounting processes and spreadsheets. That’s fine when those individuals are working for your business, but style="font-size: 16px;" what happens if they’re taken sick, leave the company or retire?

Learn more: Why spreadsheets are the wrong tool

Fundamentally, using workarounds for construction accounting is inefficient and risky. It can undermine your investment in accounting software and lead to mistakes in cost management, measurement of costs incurred and the production of accurate financial reports.

Construction accounting software to complement your ERP

Causeway Construction Project Accounting (CPA) is a construction accounting platform that integrates with your existing accounting software – meaning that it can seamlessly connect with your primary accounting environment without replacing your existing investments.

Designed specifically for the construction industry, it provides you with a reliable, efficient and accurate way to do things like:

By using smart digital technology, CPA allows you to avoid endless workarounds. It saves you from dealing with multiple spreadsheets and merging data from various sources.

An intuitive interface means it is easy for anyone to use (you don’t need to know the intricacies of your finance manager’s spreadsheet!) and it lets you automate many repetitive, mundane tasks so your accounts teams can focus on higher value work.

If you no longer wish to rely on workarounds for construction accounting, try Causeway Construction Project Accounting. Contact us for a demo, or learn more in our blog.

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