In celebration of the upcoming Construction Financial Management Association (CFMA) Annual Conference & Exhibition, we’re focusing on some best practices for finance experts in our industry. Construction accounting is inherently complex and fraught with potential errors. Especially if you have many manual processes. This complexity arises from the specific requirements, processes, documents, and procedures inherent to the construction industry, such as AIA billing, change orders, submittals, and Requests for Information (RFIs). Additionally, contractor payroll complications can occur when dealing with multiple states, prevailing wage requirements, or union involvement.

So, how can contractors refine their construction accounting practices?

Implement These Best Practices for Construction Accounting

Through years of experience in the construction sector, we’ve distilled ten critical accounting best practices that can enhance job profitability, streamline cash flow, and foster business growth.

1. Implement Job Costing

To track profitability accurately, contractors should apply job costing daily. This method allocates costs associated with labor, time, materials and other assets to specific jobs. To do this, you must have robust software that collects real-time field data.

2. Monitor Committed Costs Daily

It’s crucial to track the costs committed to subcontractors and materials in real-time. This practice helps control job budgets and profitability, ensuring funds are available for future and additional expenses.

3. Differentiate Between Margin and Markup

Understanding the distinction between markup (the add-on over cost price) and margin (the gross profit percentage of sales) is vital. Confusion between the two can lead to pricing errors, affecting profitability and business sustainability.

4. Evaluate Spending Versus Job Completion

Spending half your budget doesn’t mean half the work is done. Accurately tracking the percentage of funds spent and the work completed through WIP reports can prevent budget overruns.

5. Regularly Generate WIP Reports

Work In Progress (WIP) reports are essential as they detail work completed and pending over a specific period. Regular updates enable proactive management of work and profits using accurate job data, helping to anticipate issues and enhance profitability.

6. Assess Overbillings and Their Impact on Profit

While overbilling can enhance cash flow by billing ahead of work completion, if not managed well, it can lead to cash shortfalls for unfinished work. Recognizing that overbilled amounts are not immediate profits is critical.

7. Effectively Manage Change Orders

Change orders often alter the initial contract scope. Effective management involves clear, detailed contracts, introducing the change order process up front, and using structured procedures for client and internal requests. Implementing change order templates and construction accounting software can increase efficiency.

8. Monitor Unposted Payroll

Traditional accounting software may need to track unposted construction payroll effectively. Using construction project management software to monitor these costs in real time can proactively manage the impact of labor hours on the budget.

9. Track Labor Hours Daily

Accuracy in labor tracking requires workers to report their time daily using remote field-to-office tools, like the Rhumbix Timekeeping mobile app. This ensures data accuracy and operational efficiency.

10. Select an Experienced Construction Accountant

Given the unique accounting challenges in construction, engaging a CPA specializing in this industry is crucial and groom junior finance employees to advance their skills, expertise, and better understand your entire construction company. The right CPA can significantly contribute to your team of advisors and support your business’s growth.

These practices provide a roadmap for contractors aiming to enhance their accounting efficiency and overall business success in the challenging landscape of construction finance.

How can Rhumbix help Construction Finance teams?

Rhumbix is a field and workforce management platform that offers solutions tailored to streamline construction field workflows, finance and operations. Here are several ways it can assist Construction Finance teams do their jobs more efficiently and accurately:

• Digital Timekeeping: Rhumbix allows for real-time digital timekeeping, which helps accurately track labor hours and costs. This feature ensures that time cards are submitted correctly and promptly, reducing payroll errors and allocating labor costs correctly to specific projects.
• Field Data Collection: The platform enables on-site workers to input data directly from the field. This includes timekeeping and other critical data like material usage and production progress updates. Having this data available in real-time helps finance teams make timely, informed decisions regarding project budgets and forecasts.
• Workflow Automation: Rhumbix automates workflows for approvals, change orders, and other time and labor data collection, typically requiring significant manual effort. By automating these processes, the platform reduces costly mistakes and speeds up transaction times, enhancing overall financial operations and reducing overhead costs.
• Integration with Financial Systems: Rhumbix can integrate with existing financial management systems (like ERP systems), which helps ensure data consistency across platforms. This integration capability is crucial for maintaining accurate and current financial records and facilitating smoother audits and compliance processes.
• Improved Cost Visibility and Control: By providing detailed insights into project costs in real time, Rhumbix helps finance teams manage budgets more effectively. Finance teams can see where funds are being spent and identify areas where costs may be overrun, allowing quicker interventions.
• Enhanced Reporting: Rhumbix offers robust reporting tools that help finance teams generate detailed financial reports quickly. These reports can provide insights into project performance, profitability, and cost trends, essential for strategic planning and decision-making.
• Compliance and Risk Management: The field and workforce management platform helps ensure compliance with industry standards and regulations through standardize data collection and accurate time and labor tracking. This helps reduce financial risks associated with non-compliance and inaccuracies.

Upcoming Show: Construction Financial Management Association (CFMA) Annual Conference & Exhibition May 18-22, 2024

Location: Gaylord Texan Resort & Convention Center

Visit Rhumbix Booth: #827

Rhumbix provides a comprehensive suite of tools designed to enhance the accuracy, reliability, and efficiency of financial operations in the construction industry. These tools support teams in achieving better economic management and project outcomes.