What makes construction accounting unique

construction_accountingI can’t count the number of times I have heard contractors mention that their accounting system didn’t seem to fit all of their needs, so we invested heavily in customization.
It astonishes me and I ask myself, “Why?” Not why it didn’t fit their needs, but why they selected a general purpose accounting system for their construction company in the first place.

My industry experience tells me that some contractors simply do not realize that construction-specific software exists, so they buy a popular brand name that they can afford with little regard for their day to day processes and tend to focus more towards the cost reports summary.

A number of issues start to arise internally and adjustments will need to be made to a standard accounting system, in order to both report on the financial position of the organisation accurately, and to simultaneously provide construction management with useful cost information to take corrective action if required.

While every stage of the cost accounting system is important, cost tracking is one of the most critical stages, because weaknesses in data collection by individuals will have the most detrimental effect on a projects overall cost.

Traditional accounting systems do not recognize the method that must be used for budgeting in construction, which is necessary to compare actual cost to allowable cost. The comparison of actual cost and cost budgets (allowable) needs to occur at a particular point in time, normally towards the end of the month and generally before the books of account for that period have been closed.  Ideally a construction accounting system at any point in time should provide a ‘snapshot’ of actual costs in real-time in order to make a possible comparison with the estimate.

Most estimating data collection is controlled by the estimating software installed on the user’s machine and the actual cost data is captured in the accounting software. Making it awkward and sometimes impossible for certain project members to track actual costs in real time. It is therefore essential to maintain a cost management system that allows the estimating and accounting system to seamlessly integrate and allow management to evaluate the cost summary and track changes captured by various individuals within different roles involved on the project.

The key to a unique construction account management system can depend on various factors. Below are some pointers you should ask when considering the best accounting system for your construction company.

  1. Does the accounting system account for multi-year projects?
  2. Does your accounting system have specialized ledgers to accommodate unique construction requirements? i.e Plant ledger
  3. Does your accounting system integrate the accounts with monthly valuation reporting?
  4. Does your accounting system provide effective tools to control cost from the estimate through procurement to recognition of cost as materials are delivered and paid for?
  5. Does your accounting system provide effective tools for stock and subcontract management?
  6. Does your accounting system provide effective tools for debtor’s reconciliation?
  7. Does your account system integrate with a cloud based document management system to provide real-time access to compare actual and allowable costs?
  8. Is your accounting system mobile compatible?

Conclusions

Good cost accounting system is an integral part of good management and an organizational and individual responsibility. Cost management is an ongoing and interrelated process that requires frequent review to continue functioning successfully.

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