Sunday, November 16, 2008
Bridging the Gap Between Field and Office
By Don Fornes, CEO - Software Advice
Project managers and accounting staff are often a world apart. They differ in personality, computer skills and the type of work they do. While many contractors are content to let these two worlds remain separate, the best companies are integrating what’s managed in the field with what’s accounted for in the office. Importantly, these industry leaders are finding that opposites do attract.
Project managers need accurate, up-to-date job cost data. How much has been spent so far? How does that match to the budget? However, they probably don’t know what invoices have come in and what’s been paid. Accounting takes care of that. What they do know is what’s been done in the field, what’s late and who’s performing (or not).
Accounting has the job cost data. But they can’t put that information in the context of project status. Accounting folks often have a hard time answering critical questions: How do costs-to-date match to our percent-complete? What is our cost-to-complete estimate? Has this sub performed or should payment be withheld?
Forward-thinking contractors are getting a handle on their project profitability by implementing integrated project management and construction accounting software systems. By deploying an integrated system to share data between accounting and the field, they know their profits at each point in time. Even better, they can correct course before it’s too late to get a tough project back on track.
Below we highlight six principal benefits of integrating accounting and construction project management software in a single construction management software suite.
Accurate Revenue Recognition
Accountants play by the book, which in construction usually means recognizing revenue on a percentage of completion basis. Yet while they are charged with recognizing revenue, accountants aren’t the ones with the most up-to-date percentage of completion data. The project managers have that information. Publicly traded contractors, and even most private companies, will want to smoothly match their revenues to their expenses so as to avoid reporting losses, not to mention that doing so achieves a basic premise in accounting, the “matching principle”.
By integrating project management and construction accounting software, the office can understand exactly where each project stands and recognize revenue accordingly. This is especially important in light of the steady stream of invoices and payables processed by accounting.
Accurate Cost-to-Complete Estimates
Managing a project to profit is critical, but too many firms find out in retrospect that they lost money on a job. They may already be half way into the next job when they figure out why. To maintain profitability, the contractor needs to identify cost over-runs on each job and at each phase of the project.
What’s over budget? Is it a sub, labor or materials? Did we blow the estimate? Maybe we should be using different equipment... Regardless, contractors need to identify overruns early and take action.
The best contractors know their cost-complete on each job, every week or month. They identify cost over-runs immediately and have adequate time to change course towards profitability. However, to achieve this goal, they need to integrate job costs with performance data from the field. By combining project status with job costs, an integrated system can identify what’s left to be done with what it’s going to cost.
Control Expenses and Avoid Errors
What if accounting is paying a sub far more than that partner is producing in the field? A sub may be behind schedule on pouring concrete, but that doesn’t mean they’re not up-to-date on invoicing. Meanwhile a Payables Clerk may not realize that a given material is $61/yard, not the $67 deciphered from a scribbled nvoice. Operations could have caught that mistake. Accounts payable needs Operations’ input on what invoices to pay, what to modify and what to withhold.
Leading contractors are implementing a highly structured, electronic process for handling expenses. Within 24 hours of getting an invoice, it’s keyed into the system with an accompanying electronic image of the paper invoice. It is then routed to the project manager to approve, disapprove, comment on or modify. Payments are made in accordance with contract terms to improve accountability and carefully manage cash flow. This disciplined process provides easy access to up-to-date invoice data so that managers can generate accurate cost-to-complete estimates.
Maintain Profits on Change Orders
Change orders can be a great source of above-average profits on a job. However, too often they go unbilled or end up in dispute. Even if you end up negotiating a resolution to a change order dispute, you’ll probably end up making far less than you should have. It’s therefore critical that any change that has a cost or procurement impact must be tracked, approved and billed.
By integrating operations and accounting, leading contractors can manage a
tight change order process. RFIs, submittals and change orders that originate in the field are documented and tracked through a disciplined approval process that reaches back to the office, the client and any subs. In the end, these contractors are able to present a detailed cost impact analysis and the associated paper trail to their client. As a result, they are able to bill in full for the change in work.
Ultimately, productivity leads to profitability. The costs of labor and materials each day are fairly certain. What’s less certain is how much progress you’ll make by employing these resources. Hit your metrics for “soil-moved” or “pipe-laid,” and you’ve got a profit. Fall short of those metrics and you won’t recognize enough revenue to cover costs. Smart contractors realize that key productivity metrics are a leading indicator of job profitability. Where possible, they gather detailed metrics that measure their cost per unit of work.
Achieving this level of detailed measurement requires collaboration between operations and accounting. The superintendent contributes the quantities of work completed each day. These quantities when combined with the related cost information yield unit costs. An integrated system for construction management can provide the environment to collect, analyze and report this information. The resulting unit cost information is a powerful tool for gauging and improving productivity in the field.
While the personalities in operations and financial management may not necessarily match, their view on the business can. Bridging these two worlds requires a well-designed, integrated construction management program. The good news is that the technology is available to automate the ideal scenarios presented above. The challenge is to gain consensus throughout the organization that communicating, sharing data and automating those processes will make everyone’s life a lot easier.