Do you know what your profitability is at the project level? For many construction company owners, the answer is a resounding, “sort of.” At Signature Analytics we know that understanding your Job Costing, Project Tracking, and WIP Management makes all the difference in ensuring profitability. With multiple projects running at one time, it’s easy to lose track of the intricacies of each job. But, in order to grow and maintain profitability, each of these elements listed above must be executed accurately to ensure that all costs are captured.
The construction industry has complex and consequential accounting requirements. For many construction companies, bringing on an outsourced accounting team can mean more accurate financial reporting, the ability to scale and grow to the next level,and eliminating the cycle of the good years merely offsetting the bad.
There are several critical aspects of accounting for construction businesses, particularly for subcontracting companies. Job costing, project tracking, comprehending gross profit margins, accurately capturing revenue in the appropriate periods, managing payroll against projects, and understanding which job sizes best suit a company’s operational structure to manage cash flow are just a few of those aspects.
You need clear financials and experienced people to make sure your financial reporting is giving you the information you can use to bid jobs more accurately, manage your workers more effectively and increase profits today and into the future.
Here are seven elements essential to managing your construction company’s finances.
1: Monitoring Project-based Margins:
Identifying which projects – large or small – are most profitable can help guide strategic efforts toward more lucrative ventures. Reviewing job costing across multiple projects can uncover patterns. Recognizing these trends can improve future job bidding, ensuring accurate cost assignment for bid components.
2: Aligning Payroll with Projects:
Proper tracking of project-specific salary and benefits expenditure can provide valuable insights into labor cost management. Noticing that labor costs tend to rise at specific project stages might cause you to hire differently or manage performance-based incentives to ensure the timely completion of challenging stages.
3: Maintaining Precise Work-in-Progress (WIP) Analysis:
Accurate WIP analysis is crucial to determine the appropriate milestones for billing, ensuring effective revenue recognition and cash flow management.
4: Recognizing Cash Flow Patterns:
Job costing accuracy aids in predicting your expected weekly cash flow in the complex environment of the construction industry, where billing and payments can be unpredictable. You may need to bill more upfront or, you may have to manage your cash flow differently if your projects have costs that arise before their associated billing periods. Having reliable cash flow projections can mitigate stress and enable better planning for potential expenses.
5: Leveraging the Right Software:
Software that integrates job tracking with your other financial reporting systems supports the alignment of costs, sales, profits, and cash flow planning. Construction accounting software should include project tracking, job costing, and payroll tracking. A mobile time-tracking app can provide real-time labor data as well.
6: Simplifying Cost Codes:
While more detailed cost codes can provide in-depth insights, they can also complicate reporting and processing. Take a look at your least and most frequently used codes, and question whether they should be more specific or whether they should be pared down.
7: Allocating Overhead Expenses:
Overhead expenses, including administration costs, rent, utilities, equipment, etc., must be allocated by project to get a precise picture of your profit margins. Payroll and benefits should be tracked separately from overhead to understand job costing elements separately.
When it comes to payroll management, building in burdens for employees, such as health and other benefits, can be allocated to the projects. This includes the overhead costs related to the employees captured as part of the burden rate, ensuring it’s not just booked as an overhead expense.
An outsourced accounting partner can guide you to a better understanding of your profit margins and help you make smart choices to enhance them. Have questions about your unique situation? Talk to An Expert.